I Want to Cash Out My 401(k) – What Do I Need to Know?

5792635506_697faa416d_zImage credit: Miran Dalone

Cashing in your 401(k) is something that has crossed the minds of many Americans today in order to make ends meet, whether in response to an emergency, to put a child through school, or to help a friend or loved one. It certainly can be quite tempting to cash out your 401(k) retirement plan when it seems as if that money is simply sitting there and taking up space when it could be put to good use.

Before you make any decisions regarding cashing out, be aware that there will be consequences of this choice. Should you cash out your total 401(k) amount, you will immediately owe income tax on the entire chunk of change.

If you are under the age of 59 1/2 years old, you will also be charged a 10% early withdrawal penalty fee on top of paying taxes on the amount you cash out. That can put a pretty significant dent in your “take-home” amount.

Your 401(k) and other similar contribution accounts are funded with money from your paycheck before taxes. This is beneficial for you because, by taking money from your paycheck and putting it into your retirement fund, the amount of income you are taxed on lowers, bringing down your income tax bill. Naturally, you will have to pay taxes on your 401(k) money when it is withdrawn later in life, but you will not be penalized the extra 10% if you wait until you are age 59 1/2 or older to tap into those resources.

Another reason to resist cashing out your 401(k) early, is that, in some cases, you may be getting a matching contribution from your boss. These can range from fifty cents to a dollar for each dollar contributed by you. By cashing out early, you are essentially giving up this free money! Additionally, matching contributions aren’t taxed until retirement – which means your tax bill will remain the same while you are essentially making more money.

One exception is something called a Roth 401(k). This version of your retirement savings plan works in reverse to the traditional 401(k). To clarify, you will pay taxes on money as you contribute to this type of plan, so you won’t see an immediate tax break. However, you won’t be paying any taxes upon withdrawing money from a Roth 401(k) in retirement. This means that any money contributed to this account is free to compound – tax-free – without limit.

Let’s say you are considering cashing out your 401(k) to help a friend or loved one in need. In other words, you will essentially be gifting the money you take out. Unfortunately, simply because you are choosing to be generous with your savings does not afford you a tax break, and you will still be charged the full income tax amount on your 401(k) total. Luckily, you probably won’t have to pay gift tax – unless your account contains upwards of $5 million, which is the limit for tax free gifts throughout your lifetime.

Also keep in mind that if you withdraw $14,000 or less and gift that amount, you do not have to report it to the IRS. If you withdraw more than $14,000 as a gift, you will have to fill out form 709 “United States Gift Tax Return.”

The bottom line about cashing out your 401(k) for things other than retirement is this: Do your research. Make sure that you’re making the wisest decision possible given your current circumstances. If you need help determining whether or not you should raid your retirement account, contact an attorney with experience in the area(s) of Estate Planning and/or Bankruptcy.

Advertisements

How to Stop Fighting About Money

5183565442_ac2066889d_zImage Credit: US Army

Money is a hot button topic for couples all around the world. Arguing about spending habits can start before you’re married, but the problem often becomes even worse after you say “I do.” For one thing, married couples often have at least one joint bank account, and disagreements about how to spend money that is now shared can escalate quickly.

Fighting about finances is typically a bigger problem for couples who have inherently different money mindsets. One person may have always been taught to be a responsible and dependable saver, while the other may overspend or rack up excessive credit card balances. In marriages of very like-minded people, arguments about money may occur less frequently, but, if both partners are big spenders, the result can be catastrophic. Better to have some deal of conflict than to have no money at all.

Here are some things to try that can help you keep the peace in your home when it comes to talking about money:

  • Make a spending limit – Decide together on a dollar amount you’re both ok with the other spending without asking first. This will keep the spender in the relationship (or both of you, if that’s the case) from breaking the bank account. It will also give reassurance to the saver in the relationship. Any shopping trip that will go over your set dollar amount should be discussed first.
  • Pay bills together -Put a “Bill Pay Day” on the calendar and make it a priority to sit down together each month. This helps both of you physically see exactly how much money is needed to pay all of the bills, and it can be an effective reality check for big spenders.
  • Avoid pointing out who makes more money – Anytime there are money issues, the size of both of your respective paychecks could become a real sore spot. As tempting as it may be to keep your spouse in check by reminding him/her that she doesn’t bring home as much bacon as you do, is a really bad idea. Married couples should try to think in terms of their combined income rather than any discrepancy that may exist.
  • Set up auto-pay – In today’s ‘always connected’ world, pretty much all bills can be paid online. Set up as many auto payments as possible, so that you can both rest assured that your bills will be getting paid each month. This may also give an over-spender an easy way to stay within the monthly budget.

Lastly, if you’ve implemented some positive changes into your spending habits as a couple, and arguments are still erupting left and right, it may be time to discuss getting separate bank accounts. There is no hard and fast rule that says you must pool your money into one account after you marry. In reality, plenty of partners keep their own bank accounts; in fact, it may be just the solution that your relationship has been looking for.

I’ve Lost My Job; Should I File for Bankruptcy?

5004921106_3a29745800_zImage credit: Michael Duxbury

So, you’ve been laid off or fired from your job. It’s very true that leaving a job, whether voluntarily or involuntarily, can be a very stressful time in anyone’s life, and can even be quite traumatic when the job loss was not your choice and/or was unexpected. It’s important to take a breather so that you can mourn the loss of everything that you had invested in your job – things like your professional identity, daily purpose, work friends, and more. Take some time to recover from the shock before making any significant financial decisions.

Once the shock has worn off, and you feel that you have at least partially come to terms with the fact that you are now unemployed, the first thing that you should do is explore your unemployment benefits and determine exactly how much money you will be entitled to at this time. Apply for unemployment benefits as soon as possible after being laid off or fired. This will ensure that start receiving your benefits in a timely manner, which will enable you to focus on the following.

After you’ve determined your unemployment benefits status and have applied appropriately, it’s crucial that you begin thinking about all of the ways that you could possibly make money at this point in your life. Your first thought should not be to file for bankruptcy – it should be, “How can I get back into the job market ASAP?” Research shows that those people who remain unemployed for the shortest amount of time are the ones who got back on the horse and started looking for a new job right away.

Remember to network constantly – online and in person. Make sure your resume is up to date and consider having a professional resume service review it. Although this will be an additional cost that you may not feel is a necessity, it can be the difference between getting hired and remaining unemployed.

After you have put your job search into motion, your next item of priority is to look around you and decide where you can most easily and effectively lower some of your regular expenses. Look for big items that can be reduced temporarily, such as your cable or satellite bill, cell phones, gym memberships and other expenses that aren’t absolutely necessary for survival.

It is possible that some of your creditors will reduce or suspend some of your debts during a time of extreme hardship, such as an extended period of unemployment. While you are hoping to get back into the job market quickly, if that doesn’t happen right away, an experienced credit repair attorney can help you negotiate with your lenders/creditors in order to suspend or reduce payments until such time as you are fully employed once again.

While talking with your credit repair/bankruptcy attorney, he will also be able to advise you on when and under what circumstances you should consider filing for bankruptcy. Every case is unique and will have different extenuating circumstances. To speak to an attorney regarding your unemployment and financial concerns, call the Veitengruber Law office at (732) 852-7295, or write to us today.

Can HOA Fees be Discharged in Bankruptcy?

6555152005_0307deb6e5_zImage credit: Raquel Baranow

If you file for bankruptcy and owe back dues to a homeowners’ association, you are probably wondering whether or not any or all of those dues can potentially be erased by filing for bankruptcy.

Although they may not seem consequential in the grand scheme of things, homeowners’ association fees can stack up quickly, especially if you’re living in a community with a very active HOA and/or a development with a lot of amenities. It is a very valid concern to discuss these fees with your attorney during your New Jersey Chapter 7 bankruptcy case. Many people think that homeowners’ association dues and charges cannot be wiped out in a bankruptcy.

The fact is, you probably won’t be able to get all of your HOA fees discharged completely, but it is possible that you’ll be able to wave goodbye to at least a portion of your owed dues.

First, ask yourself a very important question: do you intend to keep your home or condo after your bankruptcy case is complete? If the answer is yes, you will most likely have to continue to pay your homeowner dues so that your chances of retaining the property are higher.

However, if you answered no, and you do not intend to keep your current home or condominium after filing for bankruptcy, you may be able to discharge your delinquent dues.

During your NJ Chapter 7 bankruptcy, you will be required to submit a form called Statement of Intention. This is where you will declare whether or not you intend to stay in your current residence during and after your bankruptcy, or whether you plan to surrender the property. Many people who find themselves filing for bankruptcy are doing so because their home mortgage payments have become too much to handle, and thus they surrender their homes in order to move forward with a much more affordable financial plan.

By surrendering your home, you will be able to discharge any and all homeowners’ association fees that were due up to the date of your bankruptcy filing. This is a relatively new occurrence; so you may receive some faulty information from a friend or coworker who has filed for bankruptcy in the past and was not responsible for any post-bankruptcy homeowner dues. To be clear: due to the increase in the number of foreclosures in recent years, there is currently a foreclosure “backlog” in most court systems. This means that homeowners’ associations could end up waiting possibly years to be repaid back dues from the proceeds of the foreclosure sale. Many times, the association doesn’t want to wait, and will demand payment from you for any fees and dues that accrue after you’ve filed for bankruptcy.

For more information on avoiding excessive HOA fees and other charges, contact NJ bankruptcy attorney, George Veitengruber, who can answer any and all of your questions and can help you find a way to stay in your home during and after a bankruptcy, if that is what you desire. Call the office today at (732) 695-3303!