Financial Advice For a 401k Loan

November 28, 2009 by  
Filed under IRA-401k

If you are in the situation whereby you are in need of money fast, your 401K may be looking pretty good right about now. After all, it is possible to take out a loan against your 401K. There are some rules and tips you need to remember, however. Here is some financial advice for a 401K loan.

The first point to make is: if at all possible, avoid taking out a loan against your retirement savings. Reason: this is your financial future, and there will come a day when you want every penny you can get. Remember the effects of compound interest: the larger the amount in your retirement account and the longer you keep it in there, the more money you will have when it comes time to retire.

Of course, you can choose to skip a loan and just withdraw money from your plan. However, the tax penalty you have to pay in this case will make this a very unattractive option.

Fortunately, taking out a loan against your retirement savings requires that you pay no tax penalty. However, there are limitations and restrictions for taking out this type of loan. The restrictions vary by plan, so check with your plan administrator. For most plans, the following are acceptable reasons to take out a loan against your 401K:

1. Pay for college
2. Pay your mortgage when facing possible eviction or other hardship
3. Pay medical expenses
4. You are purchasing a home for the first time

Here are some of the regulations and constraints you will most likely face when considering this type of loan:

1. There will be a minimum loan amount: usually around a thousand dollars
2. Your loan will have a prescribed length at the outset, such as 5 years or less
3. There is a maximum you can borrow, which is usually around half of your account’s value at the time of the loan
4. Depending upon your plan, you may incur loan fees for taking out a 401K loan.

If you are considering taking out this type of loan, make sure you have exhausted all of your other options first. If you have poor credit but need money fast, you may want to consider a short term personal loan instead.

Client Made a 401K Withdrawal – Uninformed Realtor Causes Client to Pay $15,000 in Unnecessary Taxes

November 28, 2009 by  
Filed under IRA-401k

I was sitting in the sauna a few weeks back, chatting with a fella who had just liquidated his 401k because he was sick and tired of the performance and so he decided to take action and buy an income property to improve his chances on higher returns. He was looking forward to the benefits of property ownership like positive cash flow, having someone one else payoff the mortgage and California property appreciation, especially since he bought during a time when housing prices are significantly less than usual. He was quite proud of his decision but he was lamenting however his heavy tax bill coming due at the end of this year because he had cashed in his 401k. I was flabbergasted. I asked if he had heard of a self-directed IRA or if his realtor and told him about it and he said no. I went on to tell him the details of self-directing but since it was after the fact, there was no way for him to avoid the tax man. It occurs to me that many folks don’t know about this amazing vehicle for investing so I wanted to bring you up to speed, especially you realtors who aren’t in the know.

A self-directed individual retirement account is an IRA that requires the account owner to make investment decisions, directions, on behalf of their own retirement plan. This is executed through a custodian that holds the assets on behalf of the owner. Usually the custodian or trustee handles all transactions and other records pertaining to the assets, including filing required IRS reports, issuing client statements, etc. The custodian does not make investment decisions or recommendations about the assets, only the owner can do that. The custodian merely executes the directions the owner gives, although they are very helpful if you have a transaction in mind and don’t know how to do it.

The interesting part about this account is what you can buy in it: stocks, bonds, mutual funds (traditional looking investments). But more interestingly are these: real estate, mortgages, franchises, partnerships, private equity and tax liens to name the most common. There are just a few exclusions like life insurance and collectibles.

Let’s take an example of what you can do with your 401K. Let’s say you have $200,000 in your company’s mutual fund. You transfer the whole account into a self-directed IRA. Then you decide you want to buy a property for $250,000 and get a mortgage on it. Assuming you are allowed by your company to cash out some stock, you take out $50,000 from your 401K by selling some shares, apply for the mortgage, start collecting rent, depositing the rent checks back into your self-directed IRA, leaving the balance of $150,000 in the mutual fund. Any expenses you have on that house must be paid for with your self-directed funds. Similarly any profits you realize from that property must go back into your IRA until you turn 59 ½, like a traditional IRA, lest you want to pay the 10% penalty and taxes that constitute a 401K early withdrawal. Let’s continue the example: after holding the property for 10 years you decide you want to sell it. You sell and get $400,000 for the property, depositing more than $150,000 into your IRA. A nice return on your money, no?

What have you accomplished? You have a nicely diversified portfolio: company mutual funds and an investment property. This is a simplified example for illustrative purposes but there are many creative ways to use this. Another example where you can be a passive real estate investor would be to direct your IRA to purchase equity shares in a real estate company that does the investing for you.

Obviously there are custodian fees associated with the account, like any other type of brokerage account but hopefully your returns will exceed your fees, just like when you are in the stock market. There are several companies that offer custodial services and a simple Google search of self-directed IRAs will provide that. Be sure to do cost comparisons based on the number of transactions you intend to do. This is a basic introduction to self-directed IRAs and is not intended to be comprehensive so please consult a professional before making that move but it is a very exciting vehicle for wealth building so I encourage you to take a closer look.

Please add any comments to this discussion on self-directing your IRA. Peace.

Megan McGinnis
Get Connected!
http://www.megan-mcginnis.com

McGinnis is a real estate investor, financial strategist and happy blogger in Southern California.

Are Your 401(K) Administrators Making More Money Than You?

November 28, 2009 by  
Filed under IRA-401k

For years, we’ve been told that making maximum contributions to our 401(k) plan is the way to secure our retirement. Recent market declines have given reason for many to rethink this idea. What can be more devastating to your investment portfolio than market declines? Fees!

401(k) plans have a reputation for charging high fees. I’ve often wondered if the people at my company who select the 401(k) administrator don’t get some kind of compensation for doing so. The fees on investments are usually very high. In addition, there may be general administration fees and fees for selecting a pre-defined portfolio! I’ve seen some 401(k) programs even use investment vehicles that deduct a 5.75% front load for each dollar contributed! In 2008, I feared for a market correction and put all of my assets into a supposedly “guaranteed” interest option thinking that I would be safe here. But no, my account still went down for the year even though I had no stock or bond exposure. Fees took away more than I earned.

While not all 401(k) programs use expensive funds, you have to dig into the fine print to see what the fees are and for what. No administrator manages your retirement account for free. Determining how much you are losing in fees is an important factor in determining how much you should contribute to you plan. If you are paying high fees, find out how much your company is matching and contribute only that amount to the plan. While you will probably need to save more, establish an IRA plan and make additional contributions there if you can. If you don’t have the discipline to save outside of the 401(k) plan, then continue to save as much as you can to that plan. Keep in mind though, your lack of discipline will cost you money.

Better yet, engage a Personal Financial Consultant to review your retirement situation to determine how much you should be saving each year. Your consultant will show you the most efficient ways to achieve your goals while keeping your fees and risks to the lowest levels possible.

3 Ways Your 401k Contributions Will Profit More Than Any Other Investment

November 28, 2009 by  
Filed under IRA-401k

You may think that you can make more money by investing outside of your 401K, but that is misleading. If you are eligible to contribute to your 401K plan then your first investment dollars should be an option within that plan. Don’t be tempted by short term gains elsewhere until you have contributed up to your contributions limits. Here are three reasons why:

1. Tax Savings.You contribute money into your plan with pre-tax dollars. That is a huge advantage in investing because more of every dollar you earn goes into your plan for your benefit.

2. Tax Deferral. All the investment income- interest, dividends, and capital gain distributions are not taxed within your 401K plan. That means your money will grow much faster without tax on the investment earnings.

3. Automatic Increase in Contributions. If you are putting a percentage of your salary into your 401K plan, then as you make more money your contributions to your plan increases. When you contribute more, you have the potential to accumulate more.

When you look at the powerful advantages above, it is hard to find any investment that can build wealth as quickly as a tax deferred plan like the 401K. Of course, there will always be high risk, high reward investments around who will tempt you to invest. With the 401K plan, even if you choose poor performing investments, over time you will have done better than if you had those same investments outside of the 401K plan. By remembering the 3 reasons above, you will stick to contributing the maximum to your 401K plan and watch the money pile up.

Should I Convert to a Roth IRA?

November 28, 2009 by  
Filed under IRA-401k

Since the creation of the Roth IRA, there have been income limits that have prevented higher earning households from opening Roth IRAs or converting traditional IRAs to Roth IRAs. On January 1, 2010, income limits will be eliminated. This will allow any interested investor to convert traditional IRAs to Roth IRAs.

Complacency with monitoring our accounts’ diversification can lead to unnecessary risk. It is best not to be complacent when considering the current IRA conversion opportunity. It can be beneficial for many investors, and now may be a great time to consider whether it is right for you.

What is a Roth IRA?

Roth IRAs allow investors to put money aside for retirement. Money added to a Roth IRA does not get an immediate income tax deduction. There is no benefit upfront. The benefit comes later.

Investors will not pay income taxes on all gains earned on that money. Any cash flow from these accounts during retirement will be completely free of state and federal income taxes.

Converting traditional IRAs to Roth IRAs

Investors can convert some or all of the funds in their traditional IRAs to Roth IRAs. In the year of conversion, the investor will be required to pay income taxes on the amount converted. However, the benefit is that the funds will never be taxed again, regardless of the gain earned.

Benefits of converting

With our retirement account values down after the market fall of the last two years, now may be a good time to convert a traditional IRA to a Roth IRA. Not only will the income tax liability be lower, but we can also take advantage of tax free gains as the market recovers.

Conversion may be good if we anticipate that our tax rates will be higher in retirement. While our highest marginal tax rate is 35% now, it has been higher in the past. Converting now enables us to pay at lower marginal tax rates than what may be in place when we choose to retire and start taking distributions.

We will also have the benefit of being in a lower tax bracket in retirement since the income we receive from the Roth IRA will be tax-free.

Another benefit of conversion is the ability to provide a lifetime of tax-free income to our beneficiaries. A stretch Roth IRA is similar to a stretch traditional IRA in that beneficiaries can take the required minimum distribution each year over their life expectancies. However, the Roth IRA option allows for both tax free growth and tax free distributions.

Before you convert, consider these issues

We should, however, make sure that we have sufficient funds available outside of our retirement accounts to pay the taxes required in the conversion. Funds cannot be taken out of a retirement account without penalty, so it is important to plan ahead to make sure funds are available before deciding to convert.

There will be an opportunity to spread the taxable income converted in 2010 over two tax years – half in 2011 and half in 2012.

We can also spread the conversion out over several years to spread out the tax payment. This may be important to keep from pushing ourselves into a higher marginal tax bracket.

This conversion opportunity can be of great benefit, especially in these current economic times. If your modified adjusted gross income (MAGI) is below the current threshold, the best window for the conversion is now. If your MAGI is too high, the conversion date is fast approaching. In either case, it is important to talk to your financial professionals now to determine if this is right for you.

Things to Avoid When Rolling Over a 401K

November 28, 2009 by  
Filed under IRA-401k

Completing a 401k rollover does not have to be the huge and complicated mess that it sometimes turns into. However, even though it does not have to be difficult, there are still a few things that you should watch out for to keep things moving along quickly. Let’s take a look at some of the things you should avoid during a 401k rollover to make things as simple and easy and possible.

The first thing to keep in mind when you need to do a 401k rollover is that, in most cases, you are not under any sort of time limit. There are a few situations where you have to move the money by a certain date, but usually there will not be a specific time frame in which you have to act. This means that you can take your time and investigate things fully. You need to be comfortable with the decisions that you are making. It is your money, after all.

Another thing to avoid is taking the money out of your 401k instead of rolling it to a new financial institution. Many people are tempted to take an early withdrawal from their 401k instead of moving it to a new company, but this is really a very bad decision to make. You’re going to end up paying 30 to 40% of your money in taxes and penalties, and you are going to shortchange your retirement savings. Not a good move.

Make sure to avoid these pitfalls when it comes time to rollover your 401k, and things will keep moving smoothly.

Six Powerful Reasons For the “Stretch” IRA

November 28, 2009 by  
Filed under IRA-401k

Do you have an IRA (Traditional or ROTH)? How about a 401(k) with an old employer? Did you know you have the ability to create an IRA that could last for decades after your beneficiaries receive the IRA? While it is not complicated to set up, implementation is a completely different story. I encourage everyone that owns an IRA to have an IRA Estate Plannerâ„¢ to prevent mistakes and create a long lasting legacy. First, why exactly, should you have the IRA “stretch?” I have listed Six powerful reasons below.

  1. Timing Flexibility of Withdrawals: Under the stretch method, the beneficiary is only required to make a minimum distribution each year and can keep the rest of the account growing tax-deferred. For beneficiaries to actively manage their taxes, it is quite possible that in a year where losses are created from other activities the beneficiary could make larger withdrawals that could be offset against any losses. In this case the result is a TAX FREE withdrawal from inherited tax-deferred wealth.
  2. An Account Many Beneficiaries Cannot Buy: The inheritance of an IRA account by a beneficiary under the age of 59.5 is an extremely valuable financial instrument because it is something they cannot buy. Individuals under age 59.5 cannot make withdrawals from regular tax-deferred retirement accounts without penalties but if they inherit one, there are no federal excise taxes on the withdrawals. With an inherited IRA, beneficiaries have a tax-deferred account in which they can manage their inherited IRA wealth without any tax consequences. If this were an inherited Roth IRA, all of this would be tax-free.
  3. Control Over Taxes: When a beneficiary takes a full distribution of an inherited IRA not only do they lose several powerful wealth preservation and creation opportunities, but at the point of full distribution they become a full-fledged partner with the IRS. The entire amount may be fully susceptible to taxes and sole control of the timing of the taxes is gone.For a beneficiary currently in their earning years, there may not be a need for much or any of the income produced from the inherited required minimum distributions. However, at retirement the beneficiary may want to expedite the withdrawals for a higher level of income. By inheriting the IRA account under the stretch method the beneficiary retains control of the withdrawal above the required minimum distribution amount.
  4. Minimization of Current Taxes: Many beneficiaries do not realize that taxable distributions from inherited IRA accounts can cause an increase in taxes for the rest of their household income. Taking a full distribution of the account substantially increases their chance of paying more taxes on all other household income. Since the taxable distribution is added to the personal tax return of the beneficiary, it is calculated with all other income. This is a major shock to many uninformed beneficiaries of these inherited assets
  5. The Inheritance of a Personal Retirement Account: The inheritance of an IRA account is an invaluable financial instrument when it comes to retirement planning for the beneficiary inheriting this asset. The inherited stretch IRA has all the same benefits and more of a personal IRA. Many of those benefits are listed in this section. In today’s inflationary environment, the inheritance of an IRA account and the ability to use the stretch method is much more than just an inheritance. For beneficiaries it can provide financial peace of mind in their own retirement as well.
  6. The Perpetuation of a Family Legacy: All too often, beneficiaries have no emotional, physical or spiritual connection to their inherited wealth. In these situations, rarely does the inheritance last beyond the second generation. Through the stretch method, beneficiaries can preserve, protect and perpetuate their inherited tax-deferred wealth until the end of their lives. Their families and descendants can enjoy the legacy created by the life, sacrifice and discipline of their parents and benefactors.

Using IRAs to Start a Business

November 28, 2009 by  
Filed under IRA-401k

Starting a business takes money. If you have an IRA, you may have a revenue source already on hand to fund your start up.

If your new business suffers initial losses, you can offset the tax penalty for withdrawing IRA funds with the business tax deductions you get for spending the money on your start up.

Be aware that if you have not reached the age of 59 1/2, you will be assessed a 10% penalty for early withdrawal of your IRA funds.

You can legitimately borrow from your IRA for sixty days, without penalty or interest. The Internal Revenue Service does, however, have a few caveats for this procedure. First, you must repay the money to your IRA within sixty days. Secondly, some of the funds you withdraw will be held as a tax deposit. So, if you borrow $10,000 from your IRA, you might actually receive only $8000, because the other $2000 is held as a tax deposit. You will have to repay the full $10,000 to your IRA, even if you only get $8000.

You need to be careful when borrowing against your IRA that you will be able to pay back the full amount, including the money the IRA custodian holds back as a tax deposit. You will not get this withheld money back until you file your income tax return.

You can also take sixty-day loans from your IRA repeatedly, as long as you meet the repayment terms. This means that rather than taking a $60,000 loan from your IRA and having to repay it plus the tax deposit within sixty days, you could take a $5000 loan from your IRA every month for a year.

In some cases, you can use the money in your IRA to invest directly in real estate. You will need an IRA trustee or custodian who approves of such investments, but they are not hard to find.

Please note that if you use your IRA money and a mortgage to purchase real estate, your IRA will have to file an income tax return. Also, your IRA will eventually owe income tax on its real estate investments because of “unrelated business income tax.’ When it comes to maneuvering IRA funds in this complex a plan, it is wise to consult a financial advisor.

It is not a wise idea to risk your IRA funds on any uncertain investments, however, if you can earn a considerable profit above your IRA interest and any applicable withdrawal penalty, you do have this reserve to draw from in order to take advantage of entrepreneurial opportunity.

When you plan to start your own business, you require more and more funds. You can take money from your IRA for such purpose. Here are some tips to use IRA effectively to satisfy your business needs offered by Chintamani Abhyankar.

How to Make Your 401K Contribution Limits on Auto-Pilot

November 28, 2009 by  
Filed under IRA-401k

Your 401K contribution limits increase every year. Although in tough economic times like this it is hard to save, the 401K plan which is provided by your employer can be a great tool to help you not only save money for the future but provide tax savings in the present. Because you contribute with money taken out of your paycheck you are taxed on a lesser amount and thus have lower taxes than if you were paying for a retirement plan outside of the 401K plan.

You will be able to contribute the maximum of $16,500 for individuals under age 50 and for those that are over 50, an additional $5,500 to the maximum of $22,000. This limit applies to 401K and Roth 401K plans.

Why contribute when you have to lock up your money for so long?

  • Just the idea that you are contributing with pre-tax dollars is a huge benefit.
  • In addition, all the investment income earned inside a 401K is tax deferred which means that you don’t have to pay taxes on the money until it is withdrawn. That is another huge benefit.

Between those two it is hard for any other investment to compare- unless of course, you were willing to take a lot of risk to make up for all the tax advantages you would lose with an investment in a 401K plan. When you make contributions to your 401K it is like the government is helping you pay for a part of your retirement plan.

Because your 401k contributions are automatically taken out of your paycheck, it is much easier to save than any other plan. Most people don’t miss the money. Your account will grow much faster because the earnings are tax deferred than any other taxable plan. You can feel secure that you have funds working for you over your work life so that you can supplement your social security with additional income.

Make contributing the maximum into your 401K plan a habit. Your contributions today can secure a better financial future for when you decide to stop working.

The Basic Things You Should Know About 401k and 401k Contribution Limit

November 28, 2009 by  
Filed under IRA-401k

Nowadays, people are now looking for further ways to save up for the future so that they can have a more convenient retirement later on. In the United States, employees have the option to allocate portions of their salaries to a retirement savings plan initiated by their employer called 401k, a term coined from a section of the tax code which is the source of this provision. It is important to know what this is all about, the benefits that these employees can get from it, including the 401k contribution limit to this plan.

The idea of a 401k plan is that it is a savings retirement plan that can be used for the wise investments of mutual funds, stocks, bonds and other money market accounts of your choice so that when the amount you have invested does well, you get more money in the long run because your savings will be compounded until the time or age you will be eligible to claim them, usually when you reach 59.5 years old. Actually, in certain circumstances, you can withdraw them earlier but with the burden of incurring heavy penalties and taxes for it. However, unless there are valid reasons, like a permanent disability, you may not be penalized for the early withdrawal. Upon death of the 401k contributor, the beneficiary can also claim for early withdrawal.

Among others, the benefits you can get from taking part of this 401k plan are as follows:

1. Taxes can be deferred until the time of withdrawal where only the net salary of the employee gets taxed for the time being.

2. Employees can benefit more especially when the company or employer, as part of employee benefits, will match your contribution with a certain percentage of your contribution.

3. Employees can loan some amount from the 401k investment which is of course payable with interest.

4. Employees can transfer or roll over their 401k contribution from their previous employer to the next employer or to another legible retirement account.

Based on current information, the maximum 401k contribution limit for 2009 is $16,500. However, for those who are aged 50 and above, they are given the opportunity to catch up on top of the maximum $16,500 contribution but can only be limited to $5,000 per year. There are also special rules governing the contribution limit of highly compensated employees where it regulates them from maximizing their contribution to the 401k plan, depending on the contribution of ordinary employees. The Internal Revenue Code wants to make sure that not only the highly compensated employees will benefit from this 401k retirement plan where the companies will have to undergo nondiscrimination tests annually to make sure that everybody, including rank and file employees have equally availed of the plan.

It is important to know that the 401k contribution limit and catch-up limits are subject to change based on the inflation rate and cost of living adjustments. So it would really help to stay informed on further updates.

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