401K Loans and Hardship Withdrawal Rules

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401K Loans and Hardship Withdrawal Rules 

401k retirement  plans are intended to grow tax-deferred continuously (without any withdrawals) up until you hit retirement age. However, we don’t live in a financially perfect world, especially with impending recession and financial crisis of 2008. Things may come up that require you to have immediate emergency funds for example death of spouse, big medical bill, etc. In such an event, yes you can withdraw money from your 401k retirement account.

401k Loan Benefits:

The main benefit of acquiring a loan from 401K Plan is that the proceeds of this loan are exempted fromtaxes and penalty fee, barring the default cases. There are no restrictions or firm guidelines on the use of loans acquired from your 401K plan . However, some plan administrators have put restrictions like number of outstanding loans  and minimum balances of loan. Basically, companies do this to decrease administrative costs. Some companies/plan administrators ask the employees to obtain consent of their spouse, if they are married, before obtaining the loan.

Limits of Loan from 401K Plan

When is a 401K loan  a good solution? The basic stipulations of 401K borrowing allow you to borrow up to 50% of your account balance up to a balance or $50,000, whichever is less. You are usually required to pay this back within a period of 5 years, unless it’s for a 401K  mortgage for your first home in which case you have a longer payback period. There is some prudence you need to exercise when making this decision. A 401K hardship withdrawal is a valid approach so long as it is not a distribution. There is a 401K penalty on early distributions.

Interest on 401K Loans

The statues that govern 401K loans do not place any restrictions on what the money can be used for expect that the loans must be made reasonably available to all individuals. In reality, an employer can restrict the reasons for loans. In some businesses, loans are restricted for the purposes of preventing home eviction, paying educational expenses, paying medical expenses or for the purposes of buying a first time residence. Most employers offering 401K loans will restrict the number of loans. Generally, the loanamount  is deducted from the paycheck each week and the loan interest rate  is set at the prime rate  plus 1%.

What to Think About Before Taking a 401k Loan.

There are other factors to consider for 401K loans. If you are planning to leave employment, often the unpaid loan will be distributed as income . The amount could then be subject to income tax  and you could suffer the 10% 410K penalty. Another factor to consider is that you can be effectively losing interest. Payments to satisfy 401K loans come from after tax dollars and any amount you contribute to the loan has an opportunity costs associated with lost investment or interest earning activity.
There are many advantages to borrowing from 401K loans. There is no need to go through credit checks and the application process is minimal. You will automatically be entitled to the loan provided it is within the established guidelines. When you pay back the interest you are effectively paying yourself and the interest is tax sheltered . You don’t pay interest on the loan until retirement.

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Tips for Safe Investing

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Tips for Safe Investing

Tips for safe investing are always one of the main things that investors are interested in learning. When deciding what kind of investments  to use there is a few things to consider. Is the investment safe? To what extent are you willing to accept risk? Especially in this volatile stock  market, it is very hard to commit to putting your money in that sector; however, there are many things to consider. If you are looking for a safe investment look at the account types below.

Also, please keep in mind that we are not going to discuss any sort of bond or preferred stock. Many people do not realize this, but they have the possibility to incur dramatic losses. With this article, we are going to stick with the safest of investments.

Money Market Accountsare usually Federal Deposit Insurance Company  (FDIC) insured  which means that they are guaranteed to retain their value and nothing can happen to your investment. The downside of this type of investment is that there are no huge gains possible like that in Direct Investment (in stocks); however, Money Market Accounts  (MMA’s) offer competitive interest rates sometimes higher than four percent. If you are interested in a guaranteed return on your investment and have a substantial pocket of money you are willing to invest you should look into Money Market Accounts. They also sometimes have penalties for taking out money, one should read the fine-print of any of these kinds of arrangements. One example of a high yield money market account is from ING DIRECT - High Yield Savings with 2.75% annual percentage yield!

Certificates of Deposit  guarantee a high interest rate of interest that is guaranteed by the FDIC of the Federal Government but requires that you leave the deposit with the company for a sizable amount of time which varies from months to years. If the money is pulled out of Certificates of Deposits early there are penalties, usually the latest three months of interest but this varies from bank to bank.

Savings Accounts are traditional that usually have a small minimum deposit and offer a reasonable interest rate that may or may not beat inflation. These investments are super-safe and practically as good as liquid cash. Sometimes there are fees for over-utilizing the account but they are usually minimal. A good example of a savings account is a deal like ING is offering currently where you can-earn 2.75% annual percentage yield with the Orange Savings Account - No Fees, No Minimums & No need to change banks! FDIC Insured.

If you are interested in finding good interest rates on any and all accounts listed here, I suggest looking at www.bankrate.com. This site allows you to look at the comparative interest rate of various banks in your local area or on the web. It also lists any bonuses attached to the account, some banks want you to open an account and will offer fiduciary rewards for starting and keeping an account with them. It is worth looking at.

I hope that these descriptions will open you up to the world of banking and that you will be able to save well with your comfort level. Remember anything that is not FDIC insured is not guaranteed and can lose value.

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How to Shop for Life Insurance

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HOW TO SHOP FOR LIFE INSURANCE

In order to be able to shop for the best premiums, it’s a good idea to know how premiums are calculated by insurers. Bear in mind that premiums vary among insurancecompanies, and it is a good idea to ask several insurers  for their rates.

Insurance companies place individuals into four risk groups: preferred, standard, substandard, or uninsurable. The premiums charged will be commensurate with the category you are placed in. Thus, a standard risk will pay an average premium for similarly situated insurers.

Click here to run your own term insurance comparison!

If you have a high risk job or hobby, you will be considered substandard, a high risk. A terminal illness at the time you apply for insurance will render you uninsurable. Having some type of chronic illness will place you in the substandard category. People with conditions such as diabetes or heart disease can be insured, but will pay higher premiums.

TIP: One company’s category for you may not hold with another company. Thus, it still pays to shop for insurance with other companies even though one may have labeled you “substandard.”
TIP: Once an insurance company approves you for coverage, you cannot be dropped unless you stop paying your premium.

SHOPPING FOR A POLICY

In most states, there are rules, set by a group of state insurance regulators, requiring the agent to calculate two types of cost indexes that can help you to shop for a policy. You can use the indexes to compare policy costs.

One type of index, the net payment index, gauges the cost of carrying your policy for the next ten or twenty years. The lower the number, the less expensive the policy. This index is useful if you are most interested in the death benefit aspect of a policy, as opposed to the investment  aspect. The other type of index, the surrender cost index, is useful to those who have a high level of concern about the cash value. This index may be a negative number. The lower the number, the less expensive the policy. These two indexes apply to term and whole life policies. With universal life policies, focus on the cash value growth and the cash surrender value to make comparisons. Cash surrender value is the amount you receive if you cancel the policy. It is not the same as cash accumulation value. If you are shown two universal life policies, and they have the same premium, death benefit, and interest rate, then the one with the higher cash surrender value is generally the better policy.

Be aware that the projections of cash values given by some insurers may use unrealistic assumptions, and therefore might be misleading.

Here are some questions to ask about policies:

How do cash values accumulate? An early, rapid build-up is generally preferable.
How has the policy’s cash value performed in the past? You can get this information from a publication called Best Review, Life and Health. Determine how the policy performed in comparison with the company’s projection and with other insurers.

Are any special features merely bells and whistles, or do they add value for you?
What is the company’s rating with Best, Standard & Poor’s, and Moody’s? You can find these publications in public libraries. The rankings should be in the top three to ensure that a company has financial stability.

Planning Aid: To view rating information on-line, see Standard & Poor’s Rating Service

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Barack Obama’s Universal Healthcare Plan

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Barack Obama and Joe Biden’s Plan

One election promise from the Obama Team is to give us universal healthcare. There are very valid arguments on both sides of the aisle, and many foreign citizens with a government sponsored health plan  have horror story after horror story. However, regardless of how you feel about this major initiative, I have gone out and found what the plan entails, straight from the horse’s mouth.

Obama’s Plan for Health Care Reform
On health care reform, the American people are too often offered two extremes - government-run health care with higher taxes or letting the insurance companies operate without rules. Barack Obama and Joe Biden believe both of these extremes are wrong, and that’s why they’ve proposed a plan that strengthens employer coverage, makes insurance companies accountable and ensures patient choice of doctor and care without government interference.

The Obama-Biden plan provides affordable, accessible health care for all Americans, builds on the existing health care system, and uses existing providers, doctors and plans to implement the plan. Under the Obama-Biden plan, patients will be able to make health care decisions with their doctors, instead of being blocked by insurance company bureaucrats.

Under the plan, if you like your current health insurance, nothing changes, except your costs will go down by as much as $2,500 per year.

If you don’t have health insurance, you will have a choice of new, affordable health insurance options.
Make Health Insurance Work for People and Businesses - Not Just Insurance and Drug Companies.
Require insurance companies to cover pre-existing conditions so all Americans regardless of their health status or history can get comprehensive benefits at fair and stable premiums.

Create a new Small Business Health Tax Credit  to help small businesses provide affordable health insurance to their employees.

Lower costs for businesses by covering a portion of the catastrophic health costs they pay in return for lower premiums for employees.

Prevent insurers from overcharging doctors for their malpractice insurance and invest  in proven strategies to reduce preventable medical errors.

Make employer contributions more fair by requiring large employers that do not offer coverage or make a meaningful contribution to the cost of quality health coverage for their employees to contribute a percentage of payroll toward the costs of their employees health care.

Establish a National Health Insurance Exchange with a range of private insurance options as well as a new public plan based on benefits available to members of Congress that will allow individuals and small businesses to buy affordable health coverage .

Ensure everyone who needs it will receive a tax credit for their premiums.

Reduce Costs and Save a Typical American Family up to $2,500 as reforms phase in:

Lower drug costs by allowing the importation of safe medicines from other developed countries, increasing the use of generic drugs in public programs and taking on drug companies that block cheaper generic medicines from the market

Require hospitals to collect and report health care cost and quality data

Reduce the costs of catastrophic illnesses for employers and their employees.

Reform the insurance market to increase competition by taking on anticompetitive activity that drives up prices without improving quality of care.

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Speaking From Experience on Long-Term Care

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Speaking From Experience on Long-Term Care

Long Term Care is getting to be a real hot issue with many of the baby boomers that are approaching retirement. This is due to the fact that so many of these individuals have been faced with the not so enviable task of taking care of their parents due to a Long Term Care situation. While most people realize the need for this insurance, many do not follow through with a policy due to the fact that Long Term Care policies are not cheap.

A friend of mine summed up the need for long term care in one sentence. He said that long-term-care is a wonderful product because, “You just don’t want people to be relieved when you die.”

This article is from an individual that has gone through the experience, yet had a long term care policy to pay for her parent’s needs. It is a powerful real life story that can illustration why long term care is imperative.

Having worked in the long-term care (LTC) industry for the past 18 years, first as a nursing home administrator and then as an LTC insurance agent , I thought I was absolutely prepared for everything. After all, I assist clients daily with the realization that someday they might need long term care.

It’s been another matter to experience what I do for a living when the one who needs the long-term care services is someone I love. Seven years ago, my father had a stroke. He recovered his ability to function daily with the assistance of therapy. However, four years after the stroke, more debilitating symptoms began. He was diagnosed with progressive supranuclear palsy. For the past three years he has needed assistance with all of his activities of daily living.

His wife has assistance seven days a week with his care that is paid for by his LTC insurance policy . You must understand that my father is a total care patient – he needs assistance with getting out of bed, transferring to a wheelchair, bathing, dressing, feeding himself – well, you get the picture. I am convinced that without the daily assistance from his fabulous caregiver, he would have long ago been in a long-term healthcare facility.

Seeing my father’s health decline has been quite difficult. He is no longer able to have a conversation with me – but we watch old westerns on TV together and share a laugh.

It has been, to say the least, a difficult journey emotionally. However, the financial burden is nonexistent. I can’t imagine having both of these issues to deal with – one is quite enough.
Knowing what I know, I made sure my family was prepared financially for these care needs, and you should too. I encourage you to support those who might be your primary caregivers by purchasing long-term care insurance . Preparing to maintain your independence and quality of life should be an essential part of your financial plan .

Not only is LTC insurance about asset protection – even though that is what most consumers think about when discussing the product. The support of your primary caregiver is an important feature as well. Being a primary caregiver can be backbreaking. The emotional and physical toll of caring for someone 24 hours a day is exhausting.

As you plan for retirement, you MUST accept responsibility for your healthcare needs. Failing to accept that your health could fail and you could be dependent on someone for daily assistance is like leaving your house unlocked while you go on vacation. Would you consider leaving your house unlocked? Then why not consider your long term care needs?

by Stacia Vetter, CLU, CLTC, LUTCF
The author is assistant vice president and long-term care specialist with National HealthCare Corporation. She is also a recipient of the LIFE Foundation’s 2006 realLIFEstories Client Service Award.

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Finally! Executives Halting Bonuses due to 2008 Market Crash!

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By Mike Rowan

Finally! Executives Halting Bonuses due to 2008 Market Crash!

Lets put it this way. I want everybody to get paid, and get compensated as much as possible if their performance has been good for the company and for shareholders. However, this certainly has not been the case during the current mortgage crisis. As a result, ordinary investors have seen their 401k, IRA, and Retirement Accounts, plunge along with the market. When I saw the two articles that are briefly quoted below, I couldn’t help but feel that it was a step in the right direction.

“WASHINGTON (AFP) – Goldman Sachs CEO Lloyd Blankfein and six company leaders have renounced their 2008 bonuses, a company spokesman said Sunday.

Blankfein and the other company directors requested the company’s central committee in charge of bonuses not to make the payments due to the company’s poor performance in 2008. Their request was accepted, the spokesman told AFP.

“This decision applies to seven top executives,” he said.”

“Swiss bank UBS axed bonuses for top executives on Monday and said it would introduce a more transparent pay system in the most far-reaching changes on pay at a top European lender during the credit crisis.

UBS, which is struggling in the subprime crisis and whose shares slumped to a new all-time low on Monday, said Chairman Peter Kurer, Chief Executive Marcel Rohner and other executive board members would not get any bonuses this year.

Starting from 2009, top managers’ bonuses will be blocked for at least three years instead of being paid immediately and executives will receive variable pay if UBS results warrant.

Under the new system, the chairman will only be awarded a fixed salary.”

I really don’t want to beat a dead horse, but if ordinary investors are loosing their shirts, I have a problem with executives receiving multi-million dollar rewards for a lousy performance. As a small business owner, I don’t anticipate receiving any part of the Federal Bailout Package, and if I don’t perform, I don’t make money . With these moves, I feel a little bit better.

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Are We Trending Toward Socialism?

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By Mike Rowan

110 banks have asked for $170B under bailout plan

It is amazing how quickly things can change in the economy. With unprecedented government intervention, banks continue to request more and more money to remain solvent. In addition, Barack Obama revealed a plan on Friday for the government to inject cash and liquidity into General Motors and other Detroit auto makers in exchange for government ownership in the companies.

I realize that the term “Socialism” has been thrown around during the presidential campaign, especially when looking at Obama’s agenda. However, these recent developments have me thinking that we are definitely trending in that direction. After all, the nationalization of companies fits the socialist definition to an absolute “T”

Here is a breakdown of the banks and their recent activity:

At least 110 banks have requested more than $170 billion from the Treasury Department’s rescue fund, and many more are expected to have submitted applications before Friday’s deadline.
The requests would come from the $250 billion the Treasury set aside from the $700 billion fund to purchase stock in banks.

Analysts have estimated that 62 banks have received full or preliminary approval from the Treasury for $173 billion from the Troubled Asset Relief Program. The government said Monday that American International Group Inc. also would receive $40 billion from the program.
That $40 billion, however, won’t come from the $250 billion set aside for the banks.
Another 48 banks have applied for about $6.5 billion, according to the Keefe, Bruyette & Woods report. Several banks that have filed applications said they haven’t yet decided whether to accept any funds.

American General has been a frequent topic in the news recently, however insurance companies are scrambling to remain solvent as well. As a result, four life insurance companies that are seeking regulatory approval to purchase savings and loans in order to become eligible for government funds.

One of those companies, Hartford Financial Services Group Inc., said it would be eligible to receive between $1.1 billion and $3.4 billion if its purchase of Federal Trust Bank is approved. Generally, only banks and savings and loans are eligible for direct investment from the TARP. AIG is the only nonbank company to receive such funds so far.

The total also doesn’t include American Express Co., which said Monday it has restructured as a bank holding company, reportedly to seek up to $3.4 billion in funding.

Publicly-held banks were required to file their applications by Friday. Private banks have been given an extended, though unspecified, deadline.

Nine large banks, including Bank of America Corp., Wells Fargo & Co., Citigroup Inc. and JPMorgan Chase & Co., received $125 billion last month.

The scary thing in my opinion, is where to draw the line when dealing with the government.

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Distribution Options for IRA Beneficiaries

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Distribution Options for IRA Beneficiaries

Why must I take distributions from my inherited IRA ?
IRAs are intended to provide for the retirement of the IRA holder and, after he or she is deceased, for the support of his or her beneficiaries. They are not intended to permanently shelter savings from income tax . For this reason, the IRS has established distribution rules to ensure that an IRA will be depleted over the course of the IRA holder’s and, if applicable, beneficiary’s life expectancies. The distributions that are taken to satisfy these rules are often referred to as required minimum distributions (RMDs).

What happens if I miss a required minimum distribution (RMD) from an inherited IRA ?
Generally speaking, if an IRA beneficiary fails to take an RMD by the applicable deadline (generally December 31), the beneficiary is subject to a 50% penalty on the amount that should have been taken out, but was not. However, if a spouse beneficiary is the sole beneficiary of an inherited IRA and he or she misses an RMD, there is an added consequence. In such cases, the IRA ceases to be a beneficiary IRA and is deemed to be the surviving spouse’s own IRA.

Following the death of an IRA holder, what factors are taken into consideration for determining the distribution alternatives available for the beneficiaries of the decedent’s IRA?

While many factors can impact what distributions options are available to an IRA beneficiary following the death of an IRA holder, there are three primary factors that must be taken into consideration:
1. the age the IRA holder was at the time of his or her death
2. the beneficiary’s relationship to the deceased IRA holder
3. whether the beneficiary in question was the sole beneficiary of the IRA

How does the IRA holder’s age at death affect my distribution options as an IRA beneficiary?
Whether the IRA holder died before his or her required beginning date (April 1 following the year in which the IRA holder turned age 70½) has a major impact on what beneficiary options are available to you.

What are my distribution options as an IRA beneficiary if the IRA holder died before his or her required beginning date?
When an IRA holder dies before his or her required beginning date, two basic distribution options are generally available to you as an IRA beneficiary:

Five-Year Rule: Under this option, an IRA beneficiary can generally take distributions in any amount at any time. However, the beneficiary must totally deplete his or her portion of the IRA by no later than December 31 of the year containing the fifth anniversary of the IRA holder’s death.
Life Expectancy Payments: Under this option, an IRA beneficiary must begin distributions based on his or her single life expectancy by no later than December 31 of the year following the year of the IRA holder’s death. Spouse beneficiaries, however, may wait until December 31 of the year the deceased IRA holder would have turned age 70½ to begin distributions under this rule.
(Note: The distribution options available to an IRA beneficiary following the death of an IRA holder can be significantly impacted by additional factors including the terms of the underlying IRA investments , the terms of the IRA plan agreement, and the administrative policies of the IRA trustee or custodian.)

What are my distribution options as an IRA beneficiary if the IRA holder died on or after his or her required beginning date?
When an IRA holder dies on or after his or her required beginning date, required distributions for beneficiaries, beginning in the year following the year of the IRA holder’s death, are generally determined according to the single life expectancy of the beneficiary. However, if the remaining life expectancy of the deceased holder is longer than the life expectancy of the beneficiary, the beneficiary may use the remaining life expectancy of the deceased IRA holder. For nonspouse beneficiaries (as well as spouse beneficiaries in cases where the spouse beneficiary is not the sole beneficiary) the life expectancy factor is determined according to a nonrecalculation method. On the other hand, in cases where a spouse beneficiary is the sole beneficiary, his or her life expectancy factor is determined according to a recalculation method.

When determining my required distributions as an IRA beneficiary, what does it mean to recalculate or not recalculate my life expectancy?
The federal regulations governing required IRA distributions provide two basic methods for determining life expectancy factors: recalculation and non-recalculation. With the recalculation method, an IRA holder (or spouse beneficiary) looks up a life expectancy factor for calculating required minimum distributions each year in the IRS-provided single life expectancy table found in IRS Publication 590, Individual Retirement Arrangements (IRAs). Alternatively, with the nonrecalculation method, the life expectancy factor is looked up in the life expectancy table for the first distribution year in the same way as when a person uses the recalculation method. However, in subsequent years, rather than going back to the table each year, one year is subtracted from the original life expectancy factor for each year that has passed since the first beneficiary distribution year. The life expectancy of nonspouse beneficiaries must always be determined according to the nonrecalculation method.

What beneficiary distribution options are available when a deceased IRA holder’s estate is named as the beneficiary of his or her IRA?
The distribution options available to an estate as an IRA beneficiary vary depending on whether or not the IRA holder died before his or her required beginning date. In cases where the IRA holder has died before his or her required beginning date, the IRA funds may be paid to the estate using the five-year rule (i.e., distribution may generally be made at any time in any amount provided the entire IRA is depleted by December 31 of the year containing the 5th anniversary of the IRA holder’s death). If the IRA holder died on or after his or her required beginning date, the estate may generally take distributions over the remaining (nonrecalculated) life expectancy of the deceased IRA holder.

What beneficiary distribution options are available following the death of an IRA holder when a trust is named as the beneficiary of an IRA?
If the trust meets certain criteria outlined in IRS regulations, the individual beneficiaries of the trust may be eligible for the same distributions options they would otherwise be eligible for if they had been named as direct beneficiaries of the IRA. However, in cases where the trust does not meet all of the criteria outlined in IRS regulations, the trust will either be required to take distributions in accordance with the five-year rule (if the IRA holder died before his or her required beginning date), or over the nonrecalculated life expectancy of the deceased IRA holder (if the IRA holder died on or after his or her required beginning date). In order for the individual beneficiaries of the trust to be eligible for the same distribution options they would be eligible for if they had been directly named as beneficiaries of the IRA, the trust must meet the four following criteria:
1. the trust must be valid under state law
2. the trust must be irrevocable, or become irrevocable upon the death of the IRA holder
3. the beneficiaries of the trust must be identifiable
4. a copy of the trust instrument or qualifying documentation of the trust must generally be provided to the trustee, custodian or issuer by no later than October of the year following the year of the IRA holder’s death
This information is not intended to be legal or tax advice. Please consult a tax, legal, or financial professional with questions.

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