Bob Rall

There are several similarities between a Simple IRA and a Traditional IRA, and several differences. First, the similarities: Both accounts follow the same investment, distribution, and rollover rules. They are both tax-deferred accounts, meaning that you do not pay tax on any growth or earnings inside the account until you make distributions, presumably once you are retired. They are also similar in that the contributions you make are tax-deductible. We should note that there are limits on the deductibility of IRA contributions based on factors such as income and whether you participate in an employer sponsored retirement plan. The plans are also similar in that any distributions you take from the account prior to age 59-1/2 will result in a tax penalty of 10%. The Simple IRA can be a bit harsher. If you withdraw from the plan in the first two years, you'll face a 25% early withdrawal penalty.

Now for the differences: The Simple IRA is actually an individual account that you hold as part of a small employer's retirement plan. You contribute to the account via payroll deduction, and the employer also contributes with a match. The employer can choose between a matching contribution or a nonelective contribution. The major difference between the accounts is the amount you can contribute. Currently, the IRA contribution limit is $5500 per year. If you are over age 50, you are allowed a catchup contribution, increasing the maximium contribution to $6500. For the Simple IRA, you can contribute $12,500 per year, and the over-50 catchup is $3000, allowing you to put away $15,500 towards your retirement.

Risk tolerance is a measure of your comfort level with risk. I like to call risk tolerance the "stomach test." How much risk are you comfortable with? Risk capacity is a measure of your ability to take risk, which can be totally different from your risk tolerance. If you are young, you have more capacity to take risk than someone in their golden years simply because you have more time to recover from downturns in your investment portfolio. If you have a well-paying, secure job, you have more risk capacity than someone who is living a bit closer to the edge. One final piece of the risk puzzle is your "need" to take risk. If you are on track to reach your financial goals, you may not need to take as much risk as someone who is trying to play catch-up with their finances. I hope this helps.

First, congratulations on building a solid emergency fund. That's one of the building blocks of a solid financial plan. Unfortunately, there's not a great answer for you. In today's low-interest rate environment, you will not earn much on savings. My advice is to research the online banks. Since they do not offer brick and mortar buildings, and provide all of their services online, they are able to pay a bit more on their deposit accounts. It won't be a lot, but better than getting next to nothing.

While I certainly understand your thought process, I have to disagree with your plan. My rule is that if you are going to need the funds within a 3-4 year time period, they should not be invested. While we would hope that the returns on your investments are profitable and would result in capital gains tax when you withdraw for your down payment, markets and investments can also go down. I would hate to see your down payment fund suffer a loss just when you plan to withdraw it for your home purchase.