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Consider other funds before using 401(k) for house down payment

Sat, 04 Feb 2012 17:00:21 +0000

Q: Can I tap into a retirement account to help with my down payment?

A: Ideally, the money you use for a down payment should be savings you’ve specifically set aside for a home. but if a lender demands more up-front cash than you expected, an Individual Retirement Account or 401(k) may be the only place you can turn for another $10,000, $20,000 or more.

If that’s the case, tap a Roth IRA or Roth 401(k) plan first.

Since contributions to Roth plans are fully taxed before they’re made, you can withdraw however much you’ve put into those accounts at any time without incurring any penalties or additional taxes.

If you’ve held a Roth IRA for at least five years, you can withdraw an additional $10,000 in earnings without paying any penalties or taxes to buy or renovate a first home. The next place you should turn is a traditional IRA, which will allow you to withdraw up to $10,000 for the purchase of a first home without penalty.

If you and your spouse each have a traditional IRA, then you can take $10,000 or a total of $20,000 from your two accounts penalty-free. but since contributions to traditional retirement accounts such as this are tax-deductible, you’ll have to pay income tax on withdrawals that exceed those limits.

Any withdrawals above the limits are subject to income tax and a 10 percent penalty until you reach 59½ years old.

Q: Can I take money from my 401(k) plan?

A: Your employer’s traditional 401(k) plan is the last place you should turn for a down payment.

It has no special provisions for down payments, and any “hardship withdrawals” are fully taxed and incur a 10 percent penalty until you turn 59½.

The better option is to take a loan out against your 401(k) account. you can usually borrow up to $50,000 or half the value of the account, whichever is less, and take up to five years to pay it back.

The interest you’re charged, which is generally a couple of percentage points above the prime rate, goes into your retirement account and the monthly payments are deducted from your paycheck. You’re talking about a new monthly expense that will reduce the amount you can afford to borrow for a home.

Bomapo asked: I have to write a essay and I am clueless about this topic. I’m supposed to tell why its important to invest money for retirement and why its important to diversify invesments among different asset classes. can anyone clear things up for me?College Student Credit Card

Why is it important to invest money to grow over time for retirement?

Investing in demographics: Put your money into humankind

Fri, 30 Dec 2011 01:00:13 +0000

With the number of humans on earth recently reaching seven billion, funds that take advantage of this growth explosion should offer long-term investment opportunities.

Investing in demographics: Put your money into humankind

An Ideal Retirement

Sun, 18 Dec 2011 19:00:16 +0000

With all the focus on the monetary aspects of retirement planning, it’s easy to lose sight of the big picture: your happiness during retirement. Learn some of the big issues of retirement that have little to do with money and add your own suggestions for the community.

An Ideal Retirement

Make Money in 2012

Thu, 08 Dec 2011 09:00:12 +0000

Make Money in 2012

Safe, but not much return

Sun, 04 Dec 2011 13:00:21 +0000

DEAR BRUCE: can you tell me a safe place to put money that is in a CD? I am a senior citizen who has about $4,650 in a CD. in 2005 it was earning 5 percent interest. now it is earning 0.5 percent or less. It will be coming due next month. Thanks. Paul, via email

DEAR PAUL: Unfortunately, you are caught between a major rock and a hard spot. you ask for a “safe” place, and if you mean guaranteed no loss, you’re going to have to settle for an extremely low, almost nonexistent, return on your money. That’s the way the Federal Reserve is being operated now, keeping interest down to almost nothing. Unfortunately, folks such as yourself are being penalized by the actions of your government, and there’s not much that can be done about it.

Consult the financial section in your local newspaper. most newspapers give at least a weekly synopsis of various rates around the country. you might be able to get a few pennies more by checking out the various institutions around the country that are advertising higher rates. I don’t care where the bank is, as long as it’s FDIC-insured. If you are computer literate, that information is readily available.

DEAR BRUCE: My family just sold the home of our deceased parents, which has been on the market four to five years. We all will be getting $10,000 to $11,000 from the sale of the home. It was left to us on their death, so we have been keeping up on taxes, etc. do we have to pay taxes on the money we are about to receive from the sale of the home? I have heard conflicting stories regarding this. Cyndi in Calif.

DEAR CYNDI: not to worry. the amount of money you have described is well under any estate tax from the federal government. I do not believe that you would be responsible for state taxes in California as well. Good luck.

DEAR BRUCE: My husband and I have enjoyed reading your daily emails and prudent advice. Unfortunately, my husband of 30 years passed away last month after a very short illness. We found out he had cancer, and he was gone within 30 days. I am heartbroken. My husband had just turned 59, and I am 48. I have received $150,000 in life insurance. I have a $58,000 mortgage at 4.5 percent and a second mortgage of $30,000 at a lesser rate. My base income is $58,000, but I usually am able to work overtime and increase that by an additional $20,000. I contribute to a Roth IRA, and I have a deferred compensation plan that I will max out on (save $16,000 a year pretax). My children are grown and on their own.

My question is this: Should I use the life insurance money to pay off the mortgages, or would I be better off investing that money? I don’t want to just leave it in savings and have it dwindle away. I also am not sure how to invest it, as my husband handled that and I am not a huge risk taker. thank you for any advice you can give me. — M.J. in Minnesota

DEAR M.J.: please accept my condolences. This must have been a terrible blow.

Given the paltry rate of return on safe investments in today’s world, particularly for the unsophisticated investor, I would suggest that you retire both of the mortgages. This would remove the burden of making those payments from your current income and give you a feeling of security. If you told me you were a sophisticated investor and handled this part of your married life, I would look at this differently.

The remaining $60,000 in life insurance proceeds would be combined with any other savings you may have. Right now, I would have no problem with having you tread water in CDs or some type of government security. It won’t earn much, but it’s not going anywhere. you might wish to consult with a broker who can be of major assistance.

It’s time to start taking a much more direct interest in your financial life. It’s a learning process that requires your attention and time. It’s an absolute requisite, in my opinion, because although you are not out of funds, you don’t have so much that an experienced money manager will spend a lot of time with you.

Read the business section of your local newspaper. Look at magazines such as Money and Forbes. you don’t have to read every line, but if you devote a little time to it, you’ll be surprised how much will stick. If your local community college offers finance courses at night, by all means, sign up — not to earn a degree, but for your own information.

Your new status will take some getting used to, and I’m sure your family will be supportive. When it’s all done and said, it’s up to you. I wish you all the best.

(Interested in buying or selling a house? let Bruce Williams’ “House Smart” be your guide. Price: $14.95, plus shipping and handling. call 800-337-2346.

Send your questions to Smart Money, P.O. Box 2095, Elfers, FL 34680. Send email to bruce@brucewilliams.com. Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.)

(EDITORS: For editorial questions, please contact Gail Borelli at gborelli@amuniversal.com)

DISTRIBUTED BY UNIVERSAL UCLICK FOR UFS

1130 Walnut St., Kansas City, MO 64106; 816-581-7500

FROM UNIVERSAL UCLICK

FOR RELEASE: WEDNESDAY, NOVEMBER 30, 2011

SMART MONEY by Bruce Williams

INSURANCE IS A NECESSARY EVIL

DEAR BRUCE: I am a 70-year-old single woman who is in a mess. This past year I had my home and car insurance canceled. I had a hard time getting any, because they said I had too many credit cards. I use only one and pay it off every month. Yes, I have been guilty of applying for one when offered to get a discount. I am told not to cancel them, but what am I to do? I can’t get the lowest quote on insurance and am barely surviving as it is. I have always paid my bills, so why does it matter? What are my options?

Also, what has my driving record to do with home insurance? I have had one speeding ticket in my life and one accident that was my fault. I was told I had too many claims on my insurance. three in three years. one of them wasn’t even a claim. It had to do with the roof when they were going to put a new roof on anyway. I just asked about a leak over the stove vent and they put it down as a separate claim.

Insurance companies are so unfair. My medical insurance has gone up to $176 a month, and I only get $1,400 a month. sorry I am telling you all of my problems. I just need to know: What do I do about the credit cards? — Brenda, via email

DEAR BRENDA: you raise some interesting questions, and I can certainly understand your frustration.

First, you ask what difference it makes how many credit cards you have because you always pay your bills. When you have too many credit cards, it means you have the ability to go out and borrow a great deal of money very quickly without answering to anyone. Companies, particularly insurance companies, get very nervous that individuals may get themselves into trouble and borrow large sums quickly that they can never repay.

You also ask how your driving record relates to home insurance. A driving record may be considered a testament to a person’s character, and it can be one variable that underwriters take into account. someone who has a lot of tickets shows a disregard for the law.

Frequency of claims is another matter. If someone has a lot of little claims, history and statistics show that this person is very likely to have a big claim sooner or later. is it fair? no, but it is part of the system.

I can sympathize with the fact that your medical insurance is expensive. the company doesn’t really care how much your income is. It has a premium that is determined by what you want your coverage to be.

With the driving record you mentioned, I don’t think you’ll have too much trouble going to another company. you may pay a little more, but that’s a different matter.

Unfortunately, insurance is an absolute necessity in our lives. On the other side of that, there are many companies writing policies, and most coverage can be purchased. I wish I had better news for you. the one thing you can do to help your situation is to get rid of those extra credit cards that you don’t need. Dropping them could adversely affect your credit temporarily, but you have no need for those cards, and that excess credit can hurt you.

(Interested in buying or selling a house? let Bruce Williams’ “House Smart” be your guide. Price: $14.95, plus shipping and handling. call 800-337-2346.

(EDITORS: For editorial questions, please contact Gail Borelli at gborelli@amuniversal.com)

DISTRIBUTED BY UNIVERSAL UCLICK FOR UFS

1130 Walnut St., Kansas City, MO 64106; 816-581-7500

FROM UNIVERSAL UCLICK

FOR RELEASE: THURSDAY, DECEMBER 1, 2011

SMART MONEY by Bruce Williams

IT PAYS TO SEEK EXPERT ADVICE

DEAR BRUCE: My hobby is playing with the stock market. I don’t believe you need to be wealthy to make some investments. I have $1,600 in a mutual fund and $950 in various stocks. I watch these daily, and it seems I know when to hold them and when to fold them. I put $50 a month in my mutual fund and invest $60 monthly in my various stocks.

When a new company offered free shares back in 1996, I accepted them and put them in my nickname of “Peggy.” now those shares are worth over $1,000. I don’t know how to prove that “Peggy” and “Margaret” are the same person so I can move them into my brokerage account. Any help would be appreciated. — M.J., via email

DEAR M.J.: let me address your comments at the beginning.

You don’t need to be wealthy to make many investments. but more often than not, unless you’re working with clear knowledge, you can almost count on one thing: You’ll be a little bit less wealthy. I’m delighted you have had some successes, but understand this: the day trader, which is what you’re describing, is destined to fail. you are competing with computers that can buy and sell a given security in the same time you might be able to just think about the notion. very few people are going to consistently beat the computer. That’s an unfortunate part of the trading world, but that’s the way it is.

Whether you are using a broker or only the direct services, in my opinion, you need a professional to do what you’re trying to do. If you’re going to be a serious investor, you’re going to need a good broker. they have a ton of information at their fingertips to which you do not have access. that would include how to make this transfer.

The only way I know to make this transfer into a brokerage account is to find a broker whom you can trust, either by doing research or asking friends for a recommendation, and have the broker clear this up for you. I know several people who do not use their legal names for many transactions, and when presenting ID it can become a bit tricky. take with you to the broker anything you might have with your nickname on it — such as bills or correspondence — and let the broker lead you in what needs to be done to accomplish this. in my own life, I believe in using experts who are far more knowledgeable than I.

DEAR BRUCE: not a question; an observation. you and other financial writers are ignoring state gift tax laws when discussing this matter. For instance, Tennessee has only a $10,000 annual gift tax exemption per donor. beyond that, there is gift tax payable, albeit not as high as the federal rate. — James, via email

DEAR JAMES: thank you very much for writing. your observation is completely accurate. in many states there would be no additional tax, but in some it is true there would be, and the donor might want to reconstruct the gifting to avoid the state gift tax. in any case, you’ve made a valuable contribution, and I’m appreciative.

(Interested in buying or selling a house? let Bruce Williams’ “House Smart” be your guide. Price: $14.95, plus shipping and handling. call 800-337-2346.

(EDITORS: For editorial questions, please contact Gail Borelli at gborelli@amuniversal.com)

DISTRIBUTED BY UNIVERSAL UCLICK FOR UFS

1130 Walnut St., Kansas City, MO 64106; 816-581-7500

Donna S asked: I know I can use a loan from my 401k towards the down payment. if I have some money left over from the 401k after that, can I use the rest for the closing costs?
Question posted courtesy of: Chris

Can money from a 401k loan for a first time home go towards a down payment AND closing costs?

Should You Refinance Your Mortgage?

Mon, 31 Oct 2011 10:00:17 +0000

Mortgage rates have fallen quite a bit this year and 30-year fixed mortgages are averaging close to 4 percent right now. These rates are significantly lower than just a few years ago, so those of you who bought a home in the past are probably hearing a lot of talk about refinancing right now. Refinancing can certainly make sense because a lower interest rate means lower monthly payments, and ultimately a lower total cost of the loan. but is the decision to refinance really that simple?

Unfortunately, there’s more to a refinance than simply deciding to go ahead with it and get a lower rate. if you aren’t careful, you could actually find yourself in a situation where the refinance ends up actually costing you more money. So, find out if your situation makes refinancing a good idea, and if not, learn how you can make a mortgage refinance pay off in the future.

Should You Refinance Your Mortgage? originally appeared on About.com Financial Planning on Wednesday, October 19th, 2011 at 14:04:07.

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Should You Refinance Your Mortgage?

NBR | Extended Interview: Terrance Odean | Your Mind and Your Money | PBS

Fri, 28 Oct 2011 08:00:13 +0000

NBR | Extended Interview: Terrance Odean | Your Mind and Your Money | PBS

What is a 401K? Once you have money in one, can you loose any of that money do to a failing the economy?

Thu, 27 Oct 2011 10:00:17 +0000

cluelessblue asked: My mom said her 401K was getting smaller and smaller and she is not sure why. so she was told to cash it in. is that the right thing to do?
Question posted courtesy of: Brent

What is a 401K? Once you have money in one, can you loose any of that money do to a failing the economy?