Is it OK to Raid My 401(k)?

8265139231_3bcf9c8a26Image source: Chris Potter

Last week, we discussed the challenges that parents are facing when it comes to putting their kids through college while the cost of tuition has risen and continues to rise to astronomical heights.

Without careful planning years before your child(ren) even begin to think about applying to college, you could conceivably find yourself between the proverbial rock and a hard place when it comes to financing four years (and sometimes more) of continuing education. In a quandary, you may take a look at all the money you’ve saved for your upcoming retirement and wonder if you could or should borrow from one or more of those accounts – in particular, your 401(k).

Our general advice to parents who are contemplating borrowing money from their 401(k) in order to give their child a fully or at least partially funded college education is this: Back away from the 401(k). The risks associated with filching your own retirement funds include: money in your 401(k) is tax-sheltered, however, when you pay back what you borrow, you must use after-tax money. Sure, you have 12 months to pay back any money borrowed without a penalty, however, if you lose your job or leave by choice, any 401(k) loans that you have taken must be paid back immediately. If you fail to do so, you’ll be charged income tax on the remaining amount you owe, plus a 10% penalty fee.

With all of the above being said, we feel that giving blanket answers to financial questions isn’t very accurate, even regarding taking a retirement loan. So, YES, there is a case to be made for tapping into your 401(k) account, in very specific circumstances.

If you can confidently say that you are totally secure in your retirement and that you don’t actually need the money provided by your 401(k) or IRA, it could be a smart move for you to use some of that money to pay for your child’s or grandchild’s college tuition.

Another circumstance: if you happen to fall into a tax bracket that charges zero percent because you have high medical costs, distributing some of your retirement money now is probably a good idea for you and your loved ones. Wondering why? Simple – it’s better to share the wealth while you are in a zero percent tax bracket instead of gifting the money through your Last Will and Testament because it’s unlikely that your beneficiaries will be in the zero percent tax bracket at the time of your passing. In fact, some may fall into the fifty percent bracket if they had great schooling and pursued a high paying career. Naturally, because of the higher taxes they’ll have to pay, they will receive significantly less of your hard earned savings. Better to use the money now while you can get more bang for your buck.

Even if you are in a fantastically secure financial position regarding retirement, there are still better ways to help your child or grandchild pay for college than dipping into your retirement accounts, just in case things change drastically. Since retirement brings with it many uncertainties, it’s still a good idea to have your (grand)child take out some student loans. As long as the child remains in school, offer to pay for the interest on the loan. This will drastically lower the amount of accrued interest on the loan(s). After graduation, you can assist with loan payback, as long as your retirement outlook is very bright. In that situation, though, it would still be better if you were using income other than your retirement fund to help out.

Save for Retirement or Put My Kid Through College?

4075547422_112bac81a8Image courtesy of Tulane Public Relations

As the costs of attending a four-year college or university in the United States continue to rise, so do the number of parents who have or are tempted to take money from their retirement accounts in order to send their child(ren) to college.

Although the desire to provide your child with a fully funded college education is natural and admirable, robbing your retirement savings to do so is likely to be a grave financial error. And, even though being weighed down with too many student loans can be a problem of its own, remember this: you (and your child) can borrow money for college costs. You cannot borrow money to support yourself when you retire.

Many parents who were (or still are) burdened with student loans of their own have a strong desire for their children to avoid that particular hassle and instead make a debt-free entrance into adulthood. However, it’s crucial that you are able to support yourself during retirement, because the other option is to have your children care for you in your golden years. Frankly, the cost of some student loans will be much cheaper and easier for them to deal with than supporting you (and potentially your spouse) indefinitely.

Withdrawing money from your retirement accounts will do more than just reduce the balance. In fact, the lowered balance may be the least of your concerns. You will lose out on the compound interest that your retirement account(s) gain over time. Also, withdrawing money from a retirement fund can count as income which would then be taxable. With the additional income, many parents may render themselves ineligible for financial aid the following year. Another thing to keep in mind is that anyone under the age of 59 1/2 who borrows from their 401(k) will be required to pay the loan back with interest within five years.

The key to saving for both retirement and college is careful and deliberate planning. Research and invest in a 529 college savings plan. A 529 plan will allow you to save money at your own pace, making withdrawals when necessary without being charged any fees, and without being taxed. Studies show that parents who invest in a 529 plan are significantly more successful at paying for at least a portion of their child’s college tuition.

In order to be consistent, set up automatic withdrawals from your paychecks that go directly into your 529 account. This will remove the need for you to deposit money into the account, which may result in hesitancy when funds could be used elsewhere. Try to gradually increase the amount you deposit on a yearly basis or as you get income raises. Apply bonuses, tax refunds, inheritance money, and/or other financial windfalls to your 529 college account (at least in part). Ask friends and family members to donate to your savings plan in lieu of gifts whenever possible.

Sallie Mae’s Upromise program is a fantastic way to save money for college without really doing anything at all! Upromise allows you to earn up to 5% cash back on purchases made through their more than 800 affiliated online retailers. You can even earn money by eating at participating restaurants and by using e-coupons for grocery and drugstore items. Getting grandparents, aunts, uncles and other close family members to participate will help you increase your savings by leaps and bounds!

Even though the general advice is to avoid taking money from your retirement account to pay for your child’s college tuition, there are exceptions to every rule! There are some instances where it can be ok to dip into your 401K in order to write those tuition checks. Check back here next week to learn when and why doing so would be advisable.

How to Talk About Money Before Saying ‘I Do’

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Image courtesy of Podknox

While everyone knows that there are many details to iron out before saying your vows, what many people fail to recognize is the critical importance of discussing money matters before walking down the aisle.

The fact that money comes between many married couples and is one of the leading causes of divorce today should be a red flag to engaged couples. Talking seriously with your betrothed about all financial issues that may arise within a marriage may be one of the best decisions you can make to ensure your future happiness.

Be sure to approach the discussion with an open attitude and demeanor, and don’t hold anything back. Let your betrothed know now about any and all debts that you may have incurred before you two met each other. Also, be sure to fully divulge how much money you actually make, and find out your fiance’s income as well. It is best to know what you’re stepping into before tying the knot. Of course, money isn’t everything, but it is a significant portion of everything. 😉

Talk about how you both feel about: saving for retirement, putting any of your future children through college, and your general attitude toward money. Don’t forget to discuss things like: gift-giving, saving, splurging, using coupons, etc.

Many adults simply haven’t been taught how to properly express themselves when it comes to financial matters. In fact, up to 70% of adults admit to having negative feelings when it comes to talking about money with a significant other. That is a scary number! Imagine how much worse the situation could be if left until after the vows have been taken and it’s “too late” to have that conversation.

You and your significant other certainly do not have to agree 100% on all matters relating to money and finances. The important thing to do is to find your way to an agreement or a compromise of sorts. It is important to take note of any differences in opinion that you both may have regarding money now. You can set money rules so that arguments don’t ensue later, causing dangerous friction within your newly formed family.

Remember that couples don’t always necessarily come from the same financial background, so it is important to find a balance that you both agree with and feel good about before the big day arrives. Set the tone for your future money discussions by remaining calm, respectful, honest and loving. Also, keep in mind that it will continue to be important for you to discuss money on a regular basis even after you walk down the aisle. Doing so will eliminate a lot of tension and conflict in that area, and your relationship will have the potential to be that much happier and more secure. Furthermore, it may very well prevent your relationship from becoming a divorce statistic.

My Home Needs Repairs I Can’t Afford!

10490268956_c4b84777e4Image courtesy of Denis P

It’s one thing to dream longingly of replacing your worn out carpeting with stunning hardwoods throughout your home. It’s another beast entirely to be living in a home with damage that could be dangerous or hazardous to your (and your family’s) health.

But what is one to do when the cost of repairing the damage is far above and beyond what you can afford? The answer for many is simple: just live with it. In fact, according to the National Center for Healthy Housing, in 2013, 35 million homes in the U.S. have at least one safety or health hazard that needs attention. That’s forty percent of U.S. homes! Water leaking through roofs causing damage and mold formation in the walls, holes in the foundation or exterior walls that allow mice and rodents inside, water leaks inside the home due to faulty pipes and miscellaneous roofing issues are just some of the issues homeowners are facing.

These millions of homes are left in disrepair because their owners simply don’t see a financial solution that makes sense for them. Living paycheck to paycheck, struggling to make ends meet, barely able to make the minimum monthly payments on their credit cards already, most people just don’t think there’s any way to fix their houses until (and if) they somehow come into more money, or get that tax return, or a promotion, etc.

And all too often, it just feels like there is something more pressing to spend extra money on. So, the home repairs go unattended, and the problems they’re causing get compounded, which makes what may have started out as a relatively small fix, into something significant.

The good news is that there actually are programs to help people who find themselves in need of repairs to their homes. That being said, the need must be necessary and not a luxury like those gorgeous wood floors mentioned earlier. The value of the home needs to be higher after the repair to get help, too.

If you meet those qualifications, and are a low or middle-income family, you can seek out a non-profit agency called NeighborWorks America for assistance. NeighborWorks was initiated by Congress, and helps aid community development in the U.S. by matching homeowners in need with organizations that do non-profit work and offer loans for just such a purpose. You can find them online at www.nw.org.

Secondly, if you feel like the work involved to fix the place up to living conditions would just be too much, consider contacting a realtor. If your mortgage is paid off, or nearly so, putting your home on the market at a low, low price may be a good idea. There are always people looking for home projects to ‘flip’ – and your house may be the perfect one! Some potential homeowners may look at your home and then ask to qualify for an FHA 203K loan – a mortgage that covers the cost of the home and the cost of fixing it up to make it livable. After you sell, get yourself an affordable apartment where the landlord handles repairs.

There are additional options available to you that an attorney who is experienced with real property matters can help you through. Things like loan modification (to allow you to afford the repairs), bankruptcy and foreclosure are real options to homeowners in trouble. They don’t have the stigma that was associated with them in years past. For some people, they’re the long-awaited answer to all of their money problems. If you’re living in a money pit and need help tunneling out, call the team who can help today.