Today we welcome two guest bloggers, Paige Luster and Jessica Sturdy, to share their insights on online banking. Jessica and Paige are Peer Educators through the University of Illinois Extension's Financial Wellness Program.

Online banking, commonly referred to as Internet banking, is defined as the opportunity for customers to conduct financial transactions via the Internet. Almost all large financial institutions offer online banking. The features offered include funds transfer (account to account transfer or wire transfer), bill payment, loan application, and statement reconciliation.

The benefits associated with online banking include convenience, efficiency, and effectiveness. Online banking is only a few mouse clicks away, 24 hours a day, 7 days a week, free of charge. This unlimited accessibility allows customers to conveniently and instantaneously transfer money or pay bills without a trip to the ATM (including fees) and the Post Office. Online banking is incredibly efficient in the sense that one has constant visibility of their current financial position. On one page you can access and manage checking, savings, CDs, securities, and investment accounts. In relation, online banking assists in effectively managing your money by offering tools such as stock quotes, portfolio management programs, and bill payment reminders to help in tracking various accounts.

Online banking can be tough to get used to, especially when you are starting out. The transition to online banking is one that needs to be evaluated to get an idea if banking on your computer is the right choice for you!

The biggest convenience of online banking is being able to check your account balances any day of the week, at any time of the day, but this can lead to errors. If you are not keeping track of transactions you make, and are solely relying on the numbers shown on the screen, it is very easy to spend money you do not have. Some transactions, depending on the vendor and your financial institution, take longer to post online. For example, you may see that you have $100, but you forgot you wrote a check to the utility company last week for $60. This check has not posted to your account yet, so you really only have $40 of spendable money in your account. Even though it says you have $100, if you spend more than $40, it can lead to an overdraft, fees, and a big headache while sorting it out.

The most common concern associated with online banking is safety. Phishing (email prompting user to enter personal information on a fraudulent website) and Pharming (hacker whom redirects website information to a fraudulent website) are two well-known attacks on computer security. However, the best way to avoid falling victim to a scam is to use your best judgment. Be aware that no legitimate financial institution will ask for personal information (i.e. Social Security number) via phone or email. Speak to your financial institution about their specific safety policies and other online banking service concerns prior to enrollment.

Always make sure a website is "secure" before entering in any personal information! You can easily do this by checking the URL. A secure website will show https:// rather than the usual http://. The "s" stands for secure.

Some banks or credit unions enroll your account(s) in online banking right from the start, but others may require a form to be physically filled out at a local branch. In this case, there may be an initial period where you will not be able to access your accounts online.

Websites vary widely from one bank to the next. Some sites are extremely difficult to navigate and will take time to learn. If your bank, or credit union, has a site that isn't easy to utilize, take some time to read the tutorials and familiarize yourself with the layout and procedures, or consider switching financial institutions.

Overall, free and secure online banking can be used as a resource for money management. Successful management including prompt bill payment and reduction in ATM fees leads to saving money, and who doesn't like that? Online banking is offered as a convenience to you; if you run into any setbacks, make sure to contact your local branch!

I have a lot of fond memories about Earth Day going back to the 70s when I met my soon-to-be brother-in-law at an Earth Day Festival to last week when I enjoyed talking with a group of older ladies about recycling and energy conservation. Over the years I have participated in many conversations about the importance of conservation. Clearly conservation is good for the environment, but have you considered how it is also good for your finances?

Conservation involves the three "Rs": Reduce, Re-use, and Recycle. Let's think about ways you can incorporate the three "Rs" into your life:

Reduce:

• Buy things with less packaging. We win two ways with this: there is less materials to dispose of, plus typically items with more packaging cost more. For example, when food items are packaged for convenience rather than bulk, the cost per serving tends to be higher.
• Before you buy a new widget or gadget, stop and think, "Do you really need this?" Not buying something is the simplest way to lower your costs while conserving!
• Decrease your water use: repair leaks, replace current toilets with new "low-volume" toilets, turn off the water when brushing your teeth, install low-flow showerheads or take shorter showers, and more. These activities will lower your water bill.

Re-use:

• Donate items you don't need to a charity or thrift shop to be re-used.
• Buy recycled products.
• Consider new uses for items before you throw them away. For example, using packaging from an item (such as shoe box) to organize and store other items is a better solution than buying a plastic box/organizer.
• Carry your own reusable bags when you shop.

Recycle:

• Recycle items – check with your city offices to see what can be recycled locally as well as with stores and vendors that sell items.
• We often think about recycling items like newspaper, glass, cans, etc. and these are great. But think about other things too. Consider recycling electronics such as computers, TVs, cell phones. Not only are different metal and plastic parts reused, the heavy metals that are in these products are reused too and kept from leaching into our groundwater when thrown into landfills.
• Have a yard sale or sell items in another way such as E-Bay or at a consignment shop. Making money on something you don't need or want helps your finances and decreases clutter.

Conservation is a lot like saving money -- small steps make a big difference over time. You don't have to do everything at once. Brainstorm with other household members about ways you can start conserving. Think about what you can do in the short-term as well as in the long-term.

Perhaps in the short-term you can commit to a couple of things that are easy to begin such as replacing old light bulbs with CFLs (compact fluorescent lights) and turning off appliances (such as TVs and computers) when not in use. Your energy bill will be affected immediately; plus it's estimated the CFLs pay for their initially higher bulb cost within two years.

In the long-term you might decide to replace appliances with Energy Star appliances that use significantly less energy to run. Over the life time of an appliance, such as a refrigerator or dishwasher, how much energy it uses will impact your finances more than the original cost of the appliance.

I learned at my first Earth Day festival that it's worth trying new things -- what new conservation practices can you try that will save you money and be good for our global environment?

The Federal Reserve Bank of Chicago's Annual Money Smart Week kicked off this weekend. For those who don't know, Money Smart Week is a big event in Illinois. Every year, financial professionals from across the state offer over 400 free financial management workshops and activities at libraries, schools, churches, and community organizations to youth, adults, and seniors.

Today, I attended the opening celebration for Money Smart Week at the Federal Reserve Bank of Chicago. Federal Reserve Chairman, Ben Bernanke gave opening remarks via a pre-recorded video. Charles Evans, Chicago Fed President expressed concerns about the findings of the 2009 National Financial Capacity Study conducted by FINRA, a governmental regulatory body for the investment industry. The study revealed that almost 50% of respondents reported having difficulty making ends meet, only 31% of respondents age 18-29 had an emergency fund, and that most Americans are not planning for retirement. The study showed that retirement planning increased with age. However, even among respondents between the ages of 45-59, only 51% had even bothered to calculate how much they needed to save for retirement. Nearly half (41%) of respondents felt more of a sense of urgency to plan for their children's college education than to plan for retirement.

These findings let us know that there is more work to be done in the area of financial literacy. So, take out time this week to visit one or more of the over 450 free money management workshops being offered across the state. To find a workshop near you, visit www.chicagofed.org.

To further explore financial topics, check out these websites:

http://web.extension.uiuc.edu

http://www.nysemoneysense.com/

www.finra.org

www.fdic.gov

www.bankrate.com

MONEY SMART WEEK IS APRIL 17 -24, 2010

New laws and regulations, a blitz of ads about financial products, the economy in a spin ... just how are we supposed to learn about finances AND then apply it to our lives?

At times it's truly overwhelming! My only solution is to keep adding to my knowledge bit by bit by reading, talking to others, and attending presentations.

Across Illinois, people have the opportunity to add to their financial knowledge during Money Smart Week. More than 800 free classes and events that help consumers learn to manage their personal finances will be offered April 17-24th. The week is coordinated by the Federal Reserve Bank of Chicago and hundreds of partner organizations dedicated to financial literacy. It is designed to educate people about money management and increase awareness of financial education available in your community.

For more information about events slated for Money Smart Week Illinois go to www.moneysmartweek.org, or contact your local Extension office to find out about financial education programs in your community.

Sometimes people question whether attending a short presentation can make a different in knowledge; I think it can.

For example, after attending a U of I Extension financial presentation on investing, 93% of participants said, "I am more aware of how diversification can help me meet my long-term investment goals." And, 78% felt they were better prepared to avoid investment fraud.

April is National Financial Literacy month. Take this opportunity to attend a presentation that will help you manage your finances.

There are more great questions from readers. Let's see what we can learn.

Question #3 – "The Cream in the Coffee" Rule

I have several vexing questions, but most of all about your statement regarding "having to add together the balances in all of your tax-deferred IRA accounts, and calculate the proportion of that total that is from nondeductible contributions."

-- R.H., Edwardsville

Dear R.H.,

Here's an example to clarify about the adding together of all traditional IRA balances to calculate the proportion of any conversion that will be tax-free.

John has two traditional IRA accounts. All the contributions to IRA #1 were deductible, and therefore all the money in that account is tax-deferred. Its balance was $10,000 at the end of 2009. All the contributions to IRA #2 were non-deductible, so John has already paid tax on those amounts. The balance in IRA #2 is $7000, and $5000 of that is from non-deductible contributions. The remaining $2000 is from earnings, which are tax-deferred.

He wants to convert to a Roth IRA this year. He cannot "cherry pick" which account to convert. Or, to use another analogy, you can't separate the cream from the coffee. Whatever amount he converts and from whichever account, the proportion of that converted amount that comes from non-deductible contribution and is therefore tax-free is $5000/$17,000 (the nondeductible contributions divided by the total value of all traditional IRAs at the end of 2009) which is about 29%.

Hope this helps.

-------

R.H. wrote back, restating this information to verify that he understood the points. So here's the same concept in his terms:

If I could paraphrase what your wrote above, John has calculated the percentage of ALL of his IRA holdings, that represents the non-deductible Basis that is exempt from being taxed as ordinary income in a rollover to a Roth IRA. Do I have it right?

And yes, R.H., you do have it right.

More questions:

Q Who would issue the 1099-R? I am presuming that the Custodian from which the rollover originates would issue it?

A Yes, the custodian (the bank, mutual fund, brokerage, etc.) issues the 1099-R, which states the amount of the distribution.

Q The Gross Distribution would be reported from his 1099-R on Line 1, and the Taxable Amount on Line 2a of a Federal Tax Return 1099-R entry? How would the issuer know about the calculation results so that they could break those amounts out on a 1099-R, box 1 and 2a, if there were multiple holdings at different Institutions?

A You're right – they often won't know the taxable amount. According to the instructions for the 1099-R that financial custodians follow, in many cases they may enter the entire amount of the distribution in box 2-a and check "Taxable amount is not determined" in box 2-b.

Q Would you include the value of a 401-K in that calculation? Your response only addressed IRA's.

A For conversions of traditional IRAs, you only use the value of your traditional IRA accounts to calculate the basis and taxable amount of the conversions. 401(k) accounts are treated separately. And if you have more than one 401(k), you do not add them together to calculate any basis – you treat each 401(k) account separately. (See IRS Pub. 590, pp.39-42, and 62-63. It refers to "IRA (or IRAs)" when calculating any basis, but does not say that about employer plans.)

Q If I my taxable income this year is very low (interest income dropped, still have high itemized deductions), it looks like I could have an additional $8000 of ordinary income and pay no taxes. income this year...Hence (if I am correct), I could do a partial rollover from one of my IRA's, and draw from the converted amount after I turn 59 1/2 in May, without EVER having to pay any Federal Tax on the rollover. That is, as the Tax Laws presently stand.

A That appears to be correct, you could totally avoid tax on that conversion. Low-income years are the ideal time to do a conversion. But be sure you understand the rules regarding the order of distributions from Roths – (see IRS Pub 590, p. 66)

Q Is the Taxable Amount in a Rollover counted as Ordinary Income, or is it taxed as a separate entity?

A Conversions are treated as ordinary income, meaning that you will pay income tax at your marginal tax rate. They do not qualify for long term capital gains rates. The one option you have if the conversion is done in 2010 is spreading the income across the 2011 and 2012 tax years. (IRS Pub. 590, p. 28 or 39)

Q I understand that you have until April 15, 2010 to make a Contribution to a Roth IRA for the 2009 Tax Year, but what about a Conversion? It has been unbelievably difficult to find that information.

A Conversions are taxed in the tax year in which they were converted. So if your tax year is Jan. 1 to Dec. 31, as it is for most taxpayers, a conversion made on Feb. 15, 2011 will be taxable income for 2011, not 2010. (IRS Pub. 590, p.28)

Several of you have sent questions about Roth conversions since my previous posts: The (New) Rules and Factors to Consider. Today, I'll review some of those questions, and share my responses with you.

Question #1 – Conversion calculators

how can I get a calculation of whether a conversion to a roth is right for us?

--R.N., Naperville

Dear R.N.,

There are lots of calculators available on the Internet. I'd suggest trying a couple of different ones, since they don't all ask for the exact same inputs for the calculation.

Some that I have played with are:

• Schwab's Roth IRA Conversion Calculator
• Roth Retirement.com's Roth Conversion Analyzer
• Bankrate.com's Convert IRA to Roth calculator
• Fidelity's Roth Evaluator

There may be others on the web that are better than these, but these are the ones I happened to try out when doing the research for my blog posts.

The "answer" you get from most of these (whether converting to a Roth or staying with your traditional IRA will yields the best result) will probably be consistent, and that's the important thing. But the dollar amounts they arrive at may be significantly different. That doesn't mean that they disagree - the difference is whether they include or exclude the money that would be used to pay the taxes.

You could also work with a financial planner to evaluate this decision for you. They would be able to consider factors that a calculator can't, such as whether other characteristics of a Roth or a Traditional meet your needs better. If you'd like to go that route, please check out our guide to Choosing a Financial Professional at http://web.extension.illinois.edu/financialpro/.

Question #2: The price of converting

We moved money to a Roth in Dec 09. Now I find we will owe not only big bucks in penalties, increase to 85% in social security and a very big income tax bill. As for the penalties, is there no waiver for year-long estimated payments, since we didn't know we would do this for the entire year. AND most of all do we need to reverse this decision? HELP QUICK

-- P.L., New Hampshire

Below are some of the points I covered in my response to P.L. Note: Extension's role is to educate rather than to provide advice, so these points discuss facts but should not be construed as making any sort of recommendation about what P.L.- or you - should do.

The rules:

The amount you convert from an IRA or other retirement account is taxable income. Not only will you owe tax on that amount, you may need to pay estimated taxes or increase your withholding to avoid penalties for underpayment. IRS Publication 505, Tax Withholding and Estimated Tax, includes worksheets to help you figure out if you need to pay estimated taxes. You can avoid owing an underpayment penalty by making sure your withholding and refundable credits total at least 90% of your current year tax or 100% of your prior year tax (110% for high income taxpayers with adjusted gross income of over $150,000 or $75,000 if married filing separately).Use Form 2210 and instructions to determine if you have a penalty, and how to calculate it, when you file your taxes.

There are special rules for calculating estimated taxes in situations like P.L.'s, where the income is at the end of the year rather than being spread equally across the entire year. That could also reduce the penalty, if any.

This additional income may push you into a higher tax bracket, and if you're receiving Social Security benefits, it may cause some (or more) of those benefits to be taxed.

Another option:

What if you decide that converting was a bad idea? IRS Publication 590 Individual Retirement Arrangements (IRAs) has the answer. Recharacterization is a way of undoing a conversion, so that it is treated as if the conversion had never happened. (You can also recharacterize contributions). To recharacterize a conversion, you transfer the money plus earnings back to the original type of account – a traditional IRA. But the window for recharactization ends on the due date (including extensions) for the tax return for the year in which the conversion was made. If you converted in December 2009, you have until October 15, 2010 – IF you file your taxes in a timely fashion.

It would appear that recharacterizing would resolve all three issues P.L listed. Going forward, converting just a portion of the account each year might help them avoid paying tax on so much of their Social Security or being pushed into a higher tax bracket. Converting a smaller amount each year would reduce the likelihood that you'd need to pay estimated taxes, but you have to do the calculations to be sure.

Where to get help:

A qualified tax professional could help you work through an issue like this. You might consider either a CPA or an enrolled agent. You can find a CPA who specializes in personal finance (has the PFS designation) at http://pfp.aicpa.org/Community/Find+a+CPA+PFS+Near+You.htm. There is no centralized database of Enrolled Agents.

You could also look for a fee-only financial planner, most of whom should be well-versed in this. Check www.napfa.org and look for a planner who will work on an hourly (as-needed) basis, which means they would work with someone on a single specific issue such as yours. Before you schedule a meeting, ask if they help clients with this specific tax issue – most probably do, but ask first. And/or check http://www.garrettplanningnetwork.com/ whose members are also all fee-only, all of whom work on an ourly basis.

More questions

Check my next blog post for more quesions submitted by readers.