Month: October 2018

8 Reasons To Never Borrow From Your 401(k)

Don’t use your retirement savings account as a piggy bank.

Did you know you can actually take out a loan from your 401(k) retirement plan if you want to? According to recent data, about 20% of those participating in a 401(k) plan borrow money against that savings account. You might be tempted to do the same in order to pay for a large or unplanned expense, but there are many reasons why you should avoid doing so at all costs.

Below are the eight major reasons why borrowing from your 401(k) is a bad move for your long-term financial future.

By Lisa Smith

Reason #1: You Are Not Saving

If you borrow money from your 401(k) plan, most plans have a provision that prohibits you from making additional contributions until the loan balance is repaid. Even if your plan doesn’t have this provision, it is unlikely that you can afford to make future contributions in addition to servicing the loan payment.

Because the whole point of having a 401(k) plan is to use it is as a way to save for the future, you are defeating the purpose of having this account if you use it before you retire.

Reason #2: You Are Losing Money

If you not are not making contributions, not only is the entire balance that you borrowed missing out on any potential growth in the stock or bond markets, but each future contribution that you are unable to make (since you have an outstanding loan) isn’t growing either.

The extraordinarily low interest rate that you are paying to yourself with your loan payment is likely to be a pittance in terms of return on investment when compared to the market appreciation that you are missing.

“It is common to assume that a 401(k) loan is effectively cost-free since the interest is paid back into the participant’s own 401(k) account. However, there is an ‘opportunity’ cost, equal to the lost growth on the borrowed funds. If a 401(k) account has a total return of 8% for a year in which funds have been borrowed, the cost on that loan is effectively 8%. This is an expensive loan,” says James B. Twining, CFP®, CEO and founder of Financial Plan, Inc., in Bellingham, Wash.

Of course, there’s also the fact that you are paying yourself back with after-tax money. If you are in the 25% tax bracket, earning $1 only gives you $0.75 toward repaying the loan, and that $0.75 will be taxed again when you retire and withdraw it from your plan. While the interest rate on the loan may be low, you are getting taken to the cleaners by its tax implications.

Reason #3: Time Will Work Against You

Long-term investing (such as saving for retirement) is based on the idea that by putting time to work on your behalf, your money will grow. Most calculations suggest that your money will double, on average, every eight years.

401(k) plans permit each loan to be held for up to five years or longer. Therefore, if the loan is used to fund a first-time home purchase, loan holders not only lose out on what should have been an opportunity to nearly double their money, but they are also left unable to make up for the lost contribution and growth opportunities.

Over time, their balance is unlikely to ever reach the total that it would have reached had contributions continued uninterrupted. (For more insight, check out Delay in Retirement Savings Costs More in the Long Run, Understanding the Time Value of Money and Is it easier to save for retirement if you start early in life?.)

Reason #4: If Your Financial Situation Deteriorates, You Could Lose Even More Money

Should you find yourself in a position where you are unable to repay the loan, it is treated as a withdrawal and the outstanding loan balance will be subject to current income taxes in addition to a 10% early withdrawal penalty if you are under age 59½. (For more on this, read Tough Times … Should You Dip into Your Qualified Plan?.)

However, there are several exceptions to the early withdrawal penalty, such as the post-55 exception. (For more on this, check out the IRS page on this topic.)

Reason #5: You Are Trapped

If you have an outstanding loan, most plans require that the loan be immediately repaid if you quit your job. “If you cannot repay the loan 60 days after losing your job, it will become fully taxable and may be subject to a 10% early withdrawal penalty,” says Carlos Dias Jr., wealth manager, Excel Tax & Wealth Group, Lake Mary, Fla.

That means as long as you have a loan you are stuck in your current job and may be forced to pass up a better opportunity should one come along. Or, you can take the loan balance as a withdrawal and pay the 10% penalty, which further compounds the growth opportunities that you have missed by taking the loan.

Reason #6: You Lose Your Cushion

Taking a loan from your 401(k) plan should only be done in the most dire circumstances after you have completely exhausted all other potential sources of funding. If you take money from your plan to fund a vacation or pay off higher interest loans, the money won’t be there to borrow if and when you really need it.

Reason #7: It Suggests That You Are Living Beyond Your Means

The need to borrow from your savings is a red flag – a warning that you are living beyond your means. When you can’t find a way to fund your lifestyle other than by taking money from your future, it’s time for a serious re-evaluation of your spending habits.

What purchase could possibly be so important that you are willing to put your future in jeopardy and go into debt in order to get it? (For more insight, see Digging Out of Personal Debt and The Beauty of Budgeting.)

Reason #8: It Violates The Golden Rule of Personal Finance

“Pay yourself first” is the golden rule of personal finance. Violating that rule is never a good idea.

The Bottom Line
If the idea of taking a loan from your 401(k) plan crosses your mind, stop and think before you act. Instead of short-changing your future to finance your lifestyle today, consider re-evaluating your current lifestyle instead.

Scaling back on your expenses will not only reduce the burden on your wallet, it will also increase the odds that a sound retirement nest egg will be waiting for you in the future. “I have never met anyone who told me that they wished they had saved less,” says Chris Chen, CFP®, wealth strategist, Insight Wealth Strategists LLC, Waltham, Mass. “People think that they will make up a withdrawal later, but it pretty much never happens.”

Read the full article here.

When to Expect Your Tax Refund in 2019

This year’s burning tax questions, answered.

It’s almost that time of year again—time to file your taxes! Whether you put it off as long as possible or jump on it as soon as tax season starts, you know it has to get done. The article below details all the due dates and deadlines you need to know for your 2019 tax refund, along with answers to some important questions. Find out when you’ll get your refund, now!

By Thomas Minter

WHEN ARE TAXES DUE FOR THE 2018 TAX YEAR?

If you’re an early tax filer, we’ll get to you in a second. But if you plan on submitting your taxes in the spring sometime before the due date, you should expect to do so by Monday, April 15, 2019.

The IRS hasn’t stated when they will start accepting returns in 2019 yet but based on previous years, you can anticipate tax return season to officially begin on January 29, 2019. That means you can file taxes beginning on that date.

WHEN TO EXPECT A TAX REFUND IN 2019?

The big question on our minds is, “When will I get my money?”.

The fastest way to get your tax refund is to have it electronically deposited into your financial account. This is a free service.

Well, most taxpayers get their tax refunds in less than 21 days from the date the IRS received and approved their tax filing. The IRS actually doesn’t put out a calendar but rather states most people should be getting their refund within that 21 days. They also say that even if people use tax-filing software programs before tax season, filers shouldn’t eFile until the IRS has opened the tax system.

So the bottom line is that is will take about three weeks from the time your taxes have been filed. However, there are some exceptions.

WILL 2018 TAX REFUNDS MAY BE DELAYED IN 2019?
Congress passed a new law that requires the IRS to hold onto tax refunds including the Additional Child Tax Credit (ACTC) and the Earned Income Tax Credit (EITC). The IRS will hold these tax returns until February 15, 2019.

And it doesn’t matter how early you filed your return, if this is your situation, the IRS cannot release your refund until at least February 15. Last tax season, the IRS said they would start issuing these refunds on February 27, so it’s probably safe to assume those refunds will be slightly delayed again.

Why this weird law? What’s the point?

The goal of this is to lessen the prevalence of fraud. The extended hold gives the IRS time to carefully review each of these returns.

2017 and 2018 experienced many credit attacks on large institutions. We found the best way to ensure that your credit is safe, is to monitor it early and often. You can check your credit for free, and as often as you want without penalty using Credit Sesame.

WHERE’S MY REFUND?

After you file taxes, you can track your refund by using the IRS’s Where’s My Refund? tool. This tells you what stage your refund is on and when you can expect to receive it. This way, you won’t have to be in the dark about when you’re money will arrive.

Again, the fasted way to get your tax refund if to file electronically (IRS eFile) and have the funds deposited directly into your bank account. This IRS program is called direct deposit. Interestingly, You can use it to deposit your refund up to three different accounts.

Direct deposit returns are common. About eight out of ten taxpayers get their refunds through direct deposit. It is fast and safe. Then direct deposit and e-Filing is combined, the IRS issues more than nine out of ten refunds in less than 21 days.

Does This Apply To State Tax Refund?

All of this stuff about timeframes and new law – it doesn’t apply to your state tax refund. So far, we’ve only talked about federal tax refunds.

Typically, your state tax refund can take up to 30 days to get back to you if you file electronically. But if you file a paper tax return, it can take up to 12 weeks (three months!) for your refund to arrive – that’s not surprising knowing how snail mail works.

If you’re wondering where your state tax refund is, you can either contact your state tax agency or check the Department of Revenue’s website for your state.

HOW WILL THE TAX REFORM BILL AFFECT YOUR TAX REFUND IN 2019?

Back in December 2017, the government signed in new legislation that may affect the taxes you file in 2019 (2018 tax year). This new legislation could lower taxes for small business and individuals.

Here’s a quick highlight on what this tax reform will do for taxpayers:

– Lower tax rates for individuals

– Higher standard deduction

– Higher child tax credit

– No more dependent and personal exemptions allowed

– Some itemized deductions

– $10,000 limit on deductions for state income, sales, local, and property taxes combined

And there are more. But let’s take a look at the common situations that will be affected. This isn’t an exhaustive or comprehensive list of changes, just the highlights – things that may affect you.

FAMILY WITH CHILDREN

A family with kids may see bigger refunds in 2019 – the child tax credit was doubled from previous years from $1,000 to $2,000. There’s also a non-refundable credit of $500 for each dependant that is not your child.

And these benefits have in the past phases out for families with an annual income of $110,000 or more. Now, that threshold is $400,000.

STANDARD DEDUCTION INCREASE

Individual taxpayers will get a larger standard deduction in 2019 – it’s going from $6,350 to $12,000. The standard deduction for married couples who file jointly will go from $12,700 to $24,000.

ITEMIZED DEDUCTIONS AND LOWER TAX LIABILITY

If you have itemized deductions on your return, you’ll probably see fewer deductions, which in turn lower your tax liability (tax debt owed by an individual). This is especially true if you live in a state with high property taxes.

INVESTMENT EXPENSES

If you have investment accounts, you will no longer be able to deduct the fees associated with those accounts.

Before this new tax reform, you were allowed to deduct fees from custodial or investment accounts (trust admin fees, investment management fees, etc.) if they exceeded two percent of your Adjusted Gross Income. Now, those can no longer be listed as deductions.

So if your IRA is quickly growing and you want to have it for the long-run, you may want to think about paying the fees out-of-pocket. Doing this means the money in your IRA will keep growing and still be tax-deferred.

DONATIONS AND CHARITY

If you are a generous person and list your donations to charity on your tax return, listen up. If your giving is less than the standard deduction, you could think about making 50-100% more donations in 2018 to surpass the deduction threshold. Then you can itemize those donations and increase your refund amount.

Obviously, not everyone can afford this. But if you can, it may be a smart move.

LOWER TAX LIABILITY FOR THE SELF-EMPLOYED, S CORPS, AND PARTNERSHIPS

If you’re self-employed or have a partnership or S-Corp, you may have a lower tax liability this tax season. This could lead to a bigger refund for you because the tax reform allows for a 20% business income deduction for those who qualify. It also nearly doubles the amount that a small business can list as an expense for business equipment.

FORM W-4

Because of the tax reform legislation, you’ll need to file a new Form W-4 with your employer if your life situation changes or if you get a new job. Your employer will most likely be aware of these changes too and should be alerting you of any necessary steps on your part. Also, you should definitely check with your tax advisor, or the IRS website, if you still have questions.

IRS REFUND SCHEDULE IN 2019 (TAX YEAR, 2018)

Here are the 2019 IRS refund schedule estimates (2018 Tax Year) by the date your return was accepted and refund method. Estimated dates based on previous tax refund schedules released by the IRS. Typically, e-filers, combined with direct deposit, get their refund the fastest.

Note: Estimated dates based on previous tax refund schedules released by the IRS. Due to auditing processes, the IRS no longer publishes tax refund schedule charts. Refunds may be delayed this year.

After you file taxes, you can track your refund by using the IRS’s Where’s My Refund? tool. This tells you what stage your refund is on and when you can expect to receive it. This way, you won’t have to be in the dark about when you’re money will arrive.

Again, the fasted way to get your tax refund if to file electronically (IRS eFile) and have the funds deposited directly into your bank account. This IRS program is called direct deposit. Interestingly, You can use it to deposit your refund up to three different accounts.

Direct deposit returns are common. About eight out of ten taxpayers get their refunds through direct deposit. It is fast and safe. Then direct deposit and e-Filing is combined, the IRS issues more than nine out of ten refunds in less than 21 days.

Read the full article here.

5 Surprising Rules for Preserving Your Wealth

Make sure you’re maximizing your efforts so you can make the most of your retirement.

Baby boomers are beginning to retire, and so now it is time for them to start changing the way they look at investing. Investing plays a key role in the preservation of wealth. The right investment strategies can set you up for a worry-free retirement, while the wrong ones could have you scrambling when you’d much rather be relaxing.

A recent survey identified five essential rules for baby boomer investors.

By Elena Holodny

1. Stay invested for the long term.
The vast majority of retired baby boomers surveyed — 92% — think Americans need to save more for retirement by getting and staying invested in the market. Four out of five believe Americans should go for a consistent investment strategy with long-term objectives, and only 32% said they would change their strategies based on the fluctuating markets.

On a related note, billionaire investor Warren Buffett also champions the stay-in-it-for-the-long-term strategy. At the height of the financial crisis, in October 2008, he wrote in a New York Times op-ed article:

“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

2. Keep an eye on fees.
94% of retired boomers said they want to be able to “easily” understand what fees they’re paying. And 78% said low-cost, simple investments are better for the long-term.

3. Diversify your portfolio.
85% of those surveyed said that a diversified portfolio is one of the most important things for “a safe path to a better retirement.”

In other words, regular Americans just trying to save up for retirement probably shouldn’t risk putting all of their money in things like bitcoin.

4. Protect yourself against market downturns.
80% said it’s important to protect “your nest egg” and lower your risk of losses when markets swing downwards. And 30% said they wished they knew earlier about what to do when markets start getting shaky.

5. Start saving early and often.
79% said they think putting a portion of one’s monthly income toward retirement is one of the best things you can do. Moreover, 60% of respondents said they wished they had started investing as young as possible.

Although some younger investors might think diving into investing right away is intimidating or boring, those who start investing earlier could end up with significantly greater returns.

As Business Insider’s Andy Kiersz reported last year, the team at J.P. Morgan Asset Management showed a powerful illustration showing outcomes for hypothetical investors who invested $10,000 a year at a 6.5% annual rate of return over different periods of their lives.

The differences are remarkable: Chloe, who invested over her entire career from age 25 to 65, ends up retiring with nearly $1.9 million. Lyla, who started just 10 years later, has only about half of that, at $919,892.

And, somewhat astonishingly, Quincy, who invested only from ages 25 to 35, ends up with $950,588, slightly more money than Lyla, who invested for 30 years. That shows how important early compounding is to investing.

Read the full article here.