Borrowing from your 401(k)-Good idea? Bad idea?

Your 401k is a multifaceted financial tool. Not only can it save you money on taxes as it defers income tax on the money you save for your retirement, it can also play an important role in purchasing a home or even help you get out of debt. Believe it or not, if you are a first time homebuyer, you can draw money from your 401k or Traditional IRA without penalty. That does not mean you won’t pay taxes on what you draw out, it means you won’t have to pay the 10% IRS tax penalty if you draw the funds to purchase a first home.

Not only can you draw on it for a home purchase, you can borrow against it. You can borrow up to $50,000 or half of your 401k, depending on which is less. When you borrow for a home you get a longer pay back period, up to ten years. If for any other use, you will only have five years to repay. The bimonthly payment will be evenly spread out or “amortized” over the time period and will be taken after taxes from your check. The interest you pay gets reinvested in your account. Your money remains in the account working for you. Remember, this is a loan not a withdrawal.

There are advantages and some major disadvantages for borrowing against your 401k for a home purchase:

• Advantages: The money in your retirement account continues to work for you when you borrow against it. If you withdraw, you lose any shot at future market earnings.

• There are no tax penalties for taking a loan out on your 401k and repaying it.

• The interest you pay goes back into your 401k as a contribution for you and is added to your retirement funds.

• I have never seen a 401k loan show up on a credit report. You are borrowing your own money so it does not count against your FICO score. Borrowing from most consumer sources will have an affect on your credit report and score.

• Your monthly payment is taken automatically from your paycheck by your employer and credited against your loan by the 401k trustee.

Some Major Disadvantages

• If you leave your employer early, they will need to pay off your loan from the proceeds of your 401k retirement plan. It does not matter if you quit, are fired or laid off. The 401k trustee will debit the loan payoff amount from your retirement account and pay off the outstanding portion of your loan. This withdrawal will be subject to taxation and Federal IRS early retirement plan withdrawal penalties. You will pay a 10% tax penalty on the amount withdrawn and also be subject to ordinary income taxes on the pay off amount. Depending on where you live, there may also be state taxes and penalties on a withdrawal such as this.

• For some plans, when you take a loan against your 401k, you may not be able to make contributions for the time your loan is outstanding. Meaning that your retirement savings will stop until your loan is paid off. Check with your trustee for details.

• You are also repaying part of the loan with money that has already been taxed. As you know, one of the benefits of contributing to a 401k is the fact that the money is invested pre-tax. When you take a loan you aren’t taxed on the proceeds, but the money used to repay the loan has already been taxed so your additional interest going into the account will effectively be taxed twice–at the time of contribution and again when eventually withdrawn from the account in retirement. Ouch!

Most Human Resource professionals will counsel you not to take a loan on your 401k for the very reasons I described above. Not everyone stays at the same employer for 5-10 years. In the U.S., employees tend to last 4.4 years on the job according the Department of Labor Statistics. Younger employees last shorter amounts of time and older employees may stay on longer. The bottom line is that very few Americans remain on the job for the full ten years it takes for one of these loans to mature.  

You need to consider many variables when thinking of taking money from your 401k either as a withdrawal or as a loan. Some of the questions you need to ask are: How much do I need? What is the penalty if I withdraw it? How much are my taxes on that withdrawal? What is my advantage in taking out a 401k loan? How long do I plan to remain at this workplace?    

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Oct. 24th  - 6:30pm

Free Financial Workshop
Credit Myths and Repair
Sunnyvale Financial Center at Fair Oaks and El Camino Real in Sunnyvale. 
RSVP with Gmeyer@meriwest.com

Moving and Credit

There are some things that can happen to our credit when we move and it can be very troubling. Lost or misplaced statements may mean missed bills. On utilities it is not so bad as we typically have a couple of months to pay our cable or water bill. However, our credit runs on a 30 day cycle and missing a payment on a Visa card can hurt our FICO score pretty dramatically. There are some tips below for getting your mail forwarded properly.

  

When we move, we buy a new home and may go to multiple lenders to access a loan at good terms or we may have multiple inquiries for rental housing. Typically, those multiple inquiries from home lenders will be treated as one inquiry for our scoring. They will appear as multiple inquiries on our credit report and will remain there for two years but only have an effect on our score for one year. Inquiries comprise only about 10% of our total FICO score.

Another thing we do when we move is close accounts. A bank may be a regional bank, but its Visa or Mastercard is accepted worldwide. There is seldom a need to close a VISA or M/C unless the terms are unfavorable. Closing these cards reduces one’s credit score and your borrowing capacity; sometimes eliminating years of experience from a record. Be selective and careful when considering closing a credit card. Consider closing a card if a card has a small line of credit or is related to a regional or specialty store that is not available in your new town.

Clean up your old records before you move. This is a good time to shred old records and prevent ID thieves from getting their hands on them.

Here are some mail forwarding tips:

Before you move:

1. File your forwarding address with the post office at least two weeks before you move. Not only does this get your bills and statements sent on to your new home it prevents identity theft. Old statements in a mailbox are like candy to an ID thief. The post office will mail a letter to your old address to verify this change.
2.  While you are at the post office, get a change of address kit from them. Sit down at home that night and send a change of address to every company that sends you a statement or a bill. Some statements only come quarterly so be sure to check. Make sure you have the effective date of your move correctly entered. With some bills, creditors and financial institutions, you may be able to change your address online or over the phone. Note on your list who you called and to whom you sent a notice.
3. During your move: Ask a neighbor, landlord, or friend to check your mailbox to ensure the forwarding and address changes went thru and pick up any mail that does not get forwarded.
4. After your move: Contact the new tenants or homeowners and provide them with you contact data in case any of your mail fails to get forwarded in the future. 

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Our next financial workshops are:
Oct. 17th  - 6:30pm
Real World Budgets for Teens and College Students
Sunnyvale Financial Center at Fair Oaks and El Camino Real in Sunnyvale. 
RSVP with Gmeyer@meriwest.com


Oct. 24th  - 6:30pm
Credit Myths and Repair
Sunnyvale Financial Center at Fair Oaks and El Camino Real in Sunnyvale. 
RSVP with Gmeyer@meriwest.com

Does Good Debt Exist?

Good debt does still exist. Home debt, if you are not dramatically underwater is still good debt. Please remember that the majority of home owners have seen some degradation of their equity, but most homeowners are not underwater. The generally accepted number is somewhere between 20-25% of all homeowners have a home that is underwater. Most of these were either purchased or refinanced during the recent boom in prices, especially 2005 to 2008. It is a simple truth that 75% or more of all U.S. homeowners are not underwater. Homes purchased today with a reasonable downpayment of 20% or more may have some stagnant price growth in the near term, but historically, owning a home is a sure path to wealth creation. When you consider the tax advantages of owning a home and the increase in value even if it only follows regular inflation rates, new homeowners will incur good debt.

Is college debt good debt? Many are of the opinion that education is important and the resulting debt from financing it is still a good debt. That is provided the student finishes and graduates. Statistics show that lifetime earnings of those with bachelors and masters degrees are substantially higher than those with only a high school education. I have many former college students in my workshops who have not graduated and have substantial student loan debts. Those debts become good debt and will be well worth it when they finish their degrees.

Is all credit card debt bad debt? Not necessarily. Often, young persons will use a credit card like it is going out of style. They will pay for movies, dinners out, concerts, and other fun items with their credit cards. That is some bad debt; debt where you have little or nothing but memories to show for it. I think the responsible use of credit cards is in purchasing assets for your home or car. Use the card for furniture, needed appliances or a major car repair. That way, when you are on your couch writing a check for your Visa card payment, you are sitting on your asset. (A little finance humor.)

Vehicle debt can often be termed good debt. Your car is an economic development vehicle. It gets you to work on time and gets your kids to school. Is spending 2 hours plus on a bus or train daily the best use of your personal time? It is a matter of opportunity cost. How much is your personal time worth?

In the end, I think that the difference between good debt and bad debt is subjective. Our income, education, and cultural background all play a role in how we view the value, really the personal value, of our debt. 

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Our next financial workshop:

Today's Real Estate Market and Tips for Purchasing Foreclosed Property
Saturday, October 13, 2012 - 10:30 a.m.
Chesbro Financial Center, San Jose, CA

Financial Self Defense - ID Theft and Technology

 A recent study put together by The Javelin Group has some disturbing findings: The incidence of identity theft in 2012 was up 13 percent, compared to the previous year. The total amount stolen was about the same, but the thieves successfully scammed more people.

Facebook, Google+ and LinkedIn users take heed: The study found that there were specific factors that put social media users at elevated risk of getting scammed:

• 68 percent of social media users publicly shared their birthday.
• 63 percent shared the name of their high school.
• 18 percent shared their phone number.
• 12 percent shared their pet's name.

All of the above information represents the kinds of things a company would use to verify your identity, according to the study's authors. In some cases, scammers have been known to bluff their way through customer service representatives to get access to other important information - and even wipe out entire accounts. When young or vulnerable people share this information, it could make them more susceptible to stalkers or sexual predators.

The Smartphone Factor

The study also found that smartphone users were a third more likely to be victims of identity theft than non-smartphone users. This doesn't mean, necessarily, that smartphones are to blame. But it does seem to indicate that the people who use smartphones are doing something to make them more vulnerable or attractive to scammers.

What can you do to avoid being a victim?

• Password protect your phone.
• Don't use credit cards for Internet transactions over public networks. Thieves have "sniffers" that can extract that data.
• Don't store credit card numbers or bank account information on your laptop.
• Use different passwords for mobile banking apps on your phone than passwords you do for your phone and email.
• Promptly report any suspicion that your sensitive personal information has been compromised.
• Keep documents that list Social Security numbers off of your laptop, or encrypt that data if you do store there.
• Keep private information private. If any company uses specific information about you to verify your identity - your mothers' maiden name, pet names, birthdays, etc., keep it off Facebook and any other social media site.

Tip:

Is your mother on your Facebook page? Does she use her maiden name? You are vulnerable.

Pro tip: If your mother is on your Facebook page, and you share your date of birth, you are a prime candidate for ID theft.

  

Increase Wealth and Decrease Tax by Planning Your Tax-Deferred Withdrawals

Want to preserve more of your money while decreasing your exposure to tax? The best way to do that is by strategically planning how you withdraw money from your tax-deferred accounts like your 401K’s or Traditional IRA’s.

For most accounts - including savings accounts and investment portfolios - you are required to pay taxes during the year that you receive income (from interest or dividends, for example). But with a tax-deferred account, you put off the payable tax until you withdraw the money from your account. You're not taxed on the money you've earned in the account. Instead, you're taxed on the money you take out of it.

A savvy accountholder will time their withdrawals to reduce the amount of tax they owe and thus increase the amount of money they get to keep. They do this by withdrawing money during a year when their income is low (such as during a period of unemployment or retirement). This puts them into a lower tax bracket so they pay less tax on their withdrawals.

Compare this to someone who is earning six figures and withdraws money from their tax-deferred account. Because they are already in a higher tax bracket, their withdrawal adds more money to their taxable income.

The only time to consider taking the higher taxes is when you can put that money to work in an investment that will earn back far more than you expect to lose from the added tax. But, there are times when we don’t have a choice in taking money out of our retirement accounts. I am referring to the Required Minimum Distribution.

With a Traditional IRA or a 401K, one thing to consider is that at one point in your future, you will have to start taking money out of your retirement fund. This is referred to as the RMD or Required Minimum Distribution. Uncle Sam will not allow us to keep our money earning deferred interest forever! He giveth the tax deferred account and he taketh away our taxes. How? At age 70.5, or seventy and a half, you will be required to take a minimum amount out of your retirement accounts on an annual basis regardless of whether you are retired. How is that amount calculated? Well, the best way to find out your minimum distribution would be to check on IRS Publication 590, “individual Retirement Arrangements” (hard) or you can contact your IRA custodian/administrator and ask them (easy). The RMD rules also are enforced for other retirement plans such as the 403B, SEP IRA’s, and Basic Retirement Plans. Each has very specific rules so contact your retirement custodian/administrator and ask them about your specific situation.

You work hard for your money and saving for the future in a tax-deferred account is smart. Protect your wealth and reduce the taxes you owe by making sure your withdrawals coincide with times when you are in a lower tax bracket.

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Our next Financial Education Workshop will be taking place in our main office next week: 

Sept. 26^th 6:30pm – Credit Myths and Repair – Learn the top ten myths of credit management, how to access your credit report for free, and how to address information on your reports that is inaccurate, invalid, or out of date. Thousands of South Bay residents have benefitted from this workshop over the past five years. Please contact me to RSVP for the workshop. Gmeyer@meriwest.com or 408-365-6328.

Preventing ID Theft

Preventing ID Theft is not difficult. Some may have you think that you have to see your credit report on a daily basis to be safe. They appeal to the very paranoid among us with offers of free 24/7 access to your credit report for a nominal monthly fee. Does 24/7 access to your credit report really prevent ID Theft? NO. It does not prevent anything. It does not stop anyone from using your credit card number. It does not stop computer hackers from accessing your PC through the internet. It does not stop anyone from stealing your wallet and using your identity.

Being able to view your credit report on a daily basis only gives you warning AFTER someone has committed an identity crime. By the time an identity thief has built a credit account in your name and it has posted on your credit report, the damage is already done. At that point you need to file a complaint with your credit card issuer and file a fraud hold with the credit reporting agencies.

There are some things that are very difficult or even impossible for you to prevent, such as a hacker accessing your personal data from a third party’s files or if someone placed a debit/credit card skimmer at your favorite gas station or market. Both of these issues have happened to me. I have been hacked and skimmed. In both instances, I found out at least 60 days after the fact. That’s an awful long time for someone to have my data and, luckily, nothing happened. My financial institution took action as soon as they knew about it and cancelled and replaced my Debit Card each time. Not everyone is as lucky as I was.

Some of the best ID Theft prevention can be done right in your own home. Having solid anti virus protection and a good internet firewall solves a myriad of issues. For a lot of people, the firewall that is included in Windows does the job. If you are an “at risk” websurfer, meaning you wander off the regular beaten internet pathways, you might want to have something stronger than the Windows version. There are a lot of good commercial firewalls and anti virus programs available and some can be had for free.

A lot of ID theft happens when someone’s wallet or purse is stolen. Even in a paperless world, there are a lot of important papers and cards in our wallets and purses. How do we protect our cards if our wallet is taken? One simple fix is to take a permanent marker and write, “Ask for ID” in big block letters on the back of all of our credit and debit cards. Not all clerks at check out counters will check identification, but with this on the back of your card, you will see an increase in the number of stores that ask for it.

If you are notified of an ID Theft situation on your cards where your personal info is compromised or suspect it has happened, you can take some actions to prevent further losses. The first thing is to check your credit report for any recent activities that might indicate someone has your information. Go to WWW.AnnualCreditReport.com to access a copy of your credit report from all three credit bureaus. Check each report for suspicious entries. If you don’t see anything but still suspect something may come up in the near future, please contact the three major credit bureaus and place a 90 day Fraud Alert on your account.

• Equifax: WWW.Equifax.com or 800-525-6285;
• Experian: WWW.Experian.com or 888-397-3742;
• Trans union: WWW.Transunion.com or 800-916-8800

Make sure the bureaus have your proper contact data. If anyone tries to use your credit in the next 90 days without your knowledge, you will be contacted by your bureau to verify the credit inquiry. If you did not initiate the inquiry, you can stop it immediately and authorities will be notified of the fraud.

You can also place a “Credit Freeze” on your account. A “Credit Freeze” is another tool the bureaus have to prevent ID Theft. For more detailed info on what a “Credit Freeze” does and how it can be placed in your state, please check this link here from The Consumers’ Union.

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Our next Financial Education Workshops will be taking place in our main office this month.

Sept. 19^th 6:30pm – Teen Reality Based Budgets – Help your teenager or young adult learn how to create and manage a personal expense budget. This is a “life after college” simulation. Please contact me to RSVP for the workshop. Gmeyer@meriwest.com or 408-365-6328.

Sept. 26^th 6:30pm – Credit Myths and Repair – Learn the top ten myths of credit management, how to access your credit report for free, and how to address information on your reports that is inaccurate, invalid, or out of date. Thousands of South Bay residents have benefitted from this workshop over the past five years. Please contact me to RSVP for the workshop. Gmeyer@meriwest.com or 408-365-6328.

Selecting a Checking Account for your Business

Business owners have special needs when it comes to their business checking account. When one is opening a new business or considering a change in financial institutions, it pays to look beyond the standard commercial bank and do some extra research on a type of financial institution that has been around for years, the credit union. Here at Meriwest Credit Union we have been involved in business banking and lending for many years.

There are a number of questions that must be asked when you are vetting a new home for your business checking account. How will you use your checking account? Will you be writing checks or using online banking to pay bills and vendors? Using online resources can save you some money with some institutions. Are you able to designate people, such as a bookkeeper, and give them a personal secure log in account to do business or transact inquiries on the account?

What are the monthly fees and how do you get them reversed or cancelled? Is there a minimum balance requirement? Can that requirement be met by depositing funds in a savings/money market account?

Does the bank offer overdraft protection? This is often a deal breaker for a lot of business people. The best sort of overdraft protection is a line of credit associated with the account where dollars are transferred off the line of credit should a deposit need to be made when a check is clearing. Some institutions will allow you to overdraft the account slightly, while charging a significant overdraft fee of $35 or higher. The worst is what I refer to as a “Call and a Prayer Overdraft Protection;” the bank calls you to tell you that checks are clearing and you pray you make it to the bank on time to make the deposit for them to clear. This is very stressful and very expensive as they will charge you to pay those items provided you make it to the office to make the deposit on time. If you don’t make it, your checks will be returned and your time was wasted.  

More questions business owners should ask about a prospective financial institution: How convenient are the offices? Can you bank electronically? What are their hours? Do they open Saturdays?

An important aspect of this is the customer service the institution gives you. When you walk in to get information, are you recognized right away as a new client and greeted? Or are you ignored? Does the sales person strive to give you a complete run down of the information you need to make your decision or do they shove brochures at you? Does the staff appear to be well informed and competent or slightly confused and embarrassed by it? You can tell a lot about an institution from walking in on a Friday night an hour before closing and watching the flow of customers. Observe the tellers, are they competently going about their work or does a supervisor have to help with their transactions? Are customers in line pleasantly waiting or impatient? Impatience may be a signal that long waits in the teller line are common in that institution.

A few years ago, credit unions started offering business accounts to small businesses in their communities. Among the advantages of a credit union over a bank is the concept of shared banking. A business owner can go to any shared branch of any credit union across the country and make a deposit to an account at their credit union. Another advantage is that credit unions typically have fewer fees and those fees that are charged are often less than their bank competitors.

A business owner’s time is precious. It is important they spend a bit of time examining and shopping institutions they may be considering for their banking. This way they can save a lot of money, time and hassle in the future.

Meriwest Credit Union does offer a free business checking account. See our Business Banking link here to view our checking account offers for small business owners. 

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Free Homebuying Workshop

Home Buying Strategies for the Current Bay Area Housing Market

Thursday, September 13, 2012 - 6:30PM

Meriwest Credit Union Monta Loma Financial Center

580 N. Rengstorff Ave., Mountain View CA 94043