Layoffs and 401K's

As this year continues to see layoffs, I have been receiving more questions about 401k’s and what happens to them if you’re laid off. Basically, there are three options for your 401k. One is more flexible than the other two.

The first option is that you could leave your 401k with your former employer. The funds that you have contributed and a portion of your “company match” will remain invested in your selected portfolio mix. The financial firm will continue to send quarterly statements and your funds will continue to grow tax deferred.

The downside to leaving your money with your former employer is that you may have reduced flexibility. Typically, in employer sponsored plans, you will have limited investment choices, higher fees and limited access to make changes. Often times, people that have moved around from job to job have left a trail of 401k’s that are difficult to keep up with since they are with so many different employers and financial institutions.

Your second choice is “cashing in” your 401k. As I have mentioned in my previous posts, this should only be a last resort. Often times, the financial institutions will require withholding of 20% for potential tax liability and you may incur a 10% IRS penalty if you are under the age of 55. Plus, the removed funds will be taxed as ordinary income.

The third option is “rolling over” your money into an Individual Retirement Account (IRA). Typically, this is the best choice. There is no tax penalty when you rollover an IRA or do a trustee-to-trustee transfer. You can now benefit from total control of your money, continued tax-deferred growth, and more investment choices.

I am a big fan of having greater control of your money. If you would like more information on these choices, please email me.

Wishing You Wealth in all its Greatest Forms,

Alex

Should I Pay or Should I Go?

Not everyone should pay off their debt first. Often times, business owners or professionals have some debt to finance their businesses. The long range goal should always be to build wealth and sometimes it’s okay to have some debt.

There is such thing as “good debt.” If the debt allows you to create income, it can be considered good. For instance, a rental home may have a mortgage, but it allows you to create a passive income from the rental payments. Bad debt is credit cards that have compounding interest rates and don’t provide any opportunity to income.

When you will be carrying a debt for medium to longer term, weigh the interest rate on the debt against your income growth and potential investment returns over the term of the debt. If the rate of interest associated with the debt appears to outpace your growth income and returns, then you will want to pay that debt down as fast as possible. Your debt growth rate should not be higher than your average income growth rate. Look at your primary job and all other sources of income when calculating this figure.

By paying off “bad” debts and reducing the amount of accumulation of new debt will improve your FICO score and lead to lower interest rates on credit cards and other loans. A good FICO score allows you to take steps closer to financial freedom.

Wishing You Wealth in all its Greatest Forms,

Alex

The “B” word…Budget

No one likes to talk about budgets…well almost nobody. If a budget is sensible, necessary and even desirable, why do we hate them so much? The reality is that making a budget or staying with one seems to contradict our instant gratification that is part of our culture. We certainly don’t want to miss out on the latest fashions, electronics or the hippest restaurant, but a budget is as important to being successful financially as oxygen is to breathing.

A budget forces you to look at what you spend. A good budget will be able to break down, to the dollar, how much you spend on clothes, food, movies, etc. Most of us don’t like the restrictions that budgets pose, but we would do well to follow the quip “a penny saved is a penny earned.”

It will take a bit of time to set up a good budget, but you should start by understanding where you are spending your hard earned dollars now. Save all of your receipts, bank statements and credit card bills and put them in a pile. Also, you will want to either use an Excel spreadsheet or buy a software solution such as Quicken or Microsoft Money. The other option is going online to Mint or Budget Tracker and joining for free.

By getting started, you will be taking one of the first steps that will help you cement your financial future.

Wishing You Wealth in all its Greatest Forms,

Alex

Truth about the "Rapid Refund"

For most Americans, instant gratification is their mantra…even in tax season. While driving around this year, I noticed signs on every corner for “Rapid Refund.” I spent some time researching and speaking with a number of tax accountants. A “Rapid Refund” is a short term loan that is secured against your forthcoming refund. The catch is that all loans come with costs, and hefty ones at that. These refund anticipation loans (RAL’s) come with an application fee and an interest rate from 36% to 200% or more. On a refund of $2,000, the cost can be upwards of $100. It’s estimated that in the 2006 tax season, 9 million taxpayers used a RAL. Additionally, RAL’s cost the working poor an estimated $500 million per year. The IRS does not regulate these loans.

To expedite your refund, you can do an electronic filing and have the refund direct deposited to a bank account. Within 10-14 days, your refund is in your account. The way I see it, you have already waited 365 days to receive your tax refund, so what’s another 14 days? In order to correct this problem for the next year, you can contact your Human Resources department and update your W-2 income withholding. This will give you more money in each of your paychecks throughout the year. Plus, the government is no longer receiving a free loan until you file your tax return.

Wishing You Wealth in all it’s Greatest Forms,

Alex