From the Mailbag: Spreading the Wealth

I get asked a lot of questions here at Financial Elite and as always I am eager to answer the questions and send readers on their financial way. Beginning today I will be spreading the wealth (the wealth of financial knowledge that is) and will be having a weekly question and answer session. If you have questions about money and finances in general, drop me a note.

I am proud to say that my niece came to me the other day to ask about saving for her two children. She has quite a nice little nest egg saved up for them and wants to save about $500 a month, which is $250 for each of them. We are going to have lunch this week to discuss this, but the discussion is going to be about not only the children's future, but hers as well. I received this question, which falls along the same lines I plan to discuss with my niece.

My oldest child is getting ready to go to college next year. I want to stop contributing money to my 401k to fund my child's education. Is this a good idea? -- Connie B.

No, it is not. Your retirement comes first. Like my niece discussed above, I think it is great you are planning on helping your children by paying for their education. However, I know that my niece has no retirement of any kind. Not a pension, not a 401k, no IRA, absolutely no retirement savings. So I am going to tell you the same thing I am going to tell her. There is nothing more important than having a six to eight month emergency fund and to continue to invest in your future retirement.

Again I think it is awesome you want to give your child the opportunity to better him/herself and start their adult life in the best possible way, but not at the threat of jeopardizing your own financial future. It can be disappointing to tell a child that you can't afford to pay for college or maybe ask them to pay a portion themselves. They might even have to take out a student loan. Now, if you can afford to fund your retirement and pay for their college tuition then there are no issues here.  However, it is never a good idea to stop saving for retirement. For you to continue to save for another 10, 20, or 30 years is HUGE.

With company pensions and social security eventually a thing of the past, you will need to have retirement savings. If not, you will most likely end up being a financial burden to your kids. Unless you plan on working until the day you die, you need to save for retirement. Now, I am not telling anyone to kick their kids to the curb, but if you cannot invest for your future, you may have to look into other alternatives like a federal loan to help invest in theirs.

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Should I Have Cashed Out or Rolled Over My 401(K)?

Day 296 of my Financial Freedom Countdown

One of my biggest regrets during my first financial crisis is pulling money out of my 401(k). I wish I still had all the money today. However, even if I still had it, I would probably be tempted to pull it out again to pay off debt. If you are feeling the same temptation, tell Satan to get behind you right now.

Do not cash out your 401(k) unless you are retiring. One out five employed U.S. citizens have made this same mistake and now have loans against their 401(k) funds. If you make a withdrawal from your 401(k) it will result in major taxes and penalties. Most people who withdraw early end up with half as much as they originally had. I actually ended up with none.

I had at one time over $50,000 in my 401(k), but had pulled it out to pay off credit card debt. On average most American employees have $33,000 in their 401(k) at age 30. Now most financial planners would tell you that amount would turn into over $500,000 when you reach 65. Granted that you earn an average of 8-12%. So, with me having $50,000, imagine what I would have in another 30 years.

However, using the $33,000 as an example, $33,000 would end up being worth more like $18,000 after taxes and penalties. In my case, the rest of my debt had been eliminated, but my 401(k) was wiped out and I ended up paying $15,000 in income tax. Unfortunately, most people like me cash out their 401(k) when they are laid off.

If you are laid off, do everything you can to avoid the temptation of withdrawing from your 401(k). When you do go back to work, some employer 401(k) plans will allow you to re-invest your old 401(k) into your new one, but if not, you should roll your 401(k) into an IRA. I know you may busy getting adjusted on your new job and whatever else life throws at you, but you must make the roll over a priority.

Use me as an example and do not cash out your 401(k) and pay 40 percent in taxes and penalties. Do what you have must to roll it in an IRA and leave it until you retire. Fill out the roll over paperwork. Thirty minutes of your time is worth it. If not, $100,000 or more is all you have to lose. You decide.

Photo Via (401khardshipwithdrawal.com)

[This post is written and copyrighted by Financial Elite (http://financialelite.blogspot.com/ ).]

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Having Your Retirement and Eating it Too

Day 271 of my Financial Freedom Countdown

One of the most frustrating things for me when in debt is not contributing to my retirement. When my debt started to really stockpile I began cutting back on my retirement savings. For one I couldn't afford to put anything extra aside and two I thought it better to pay down my credit card debt. So should you stop contributing to your retirement just because you are in debt? The answer might just be no.

If you work for a company that has a 401K and matches your contribution, it doesn't matter how bad your finances are or how much credit card debt you have. Do not miss out on this company match.

Any match your company offers is like free money. Generally, most employers will match anywhere from three to six percent of your contribution dollar for dollar. This is too good a deal to pass up. So don't.

[This post is written and copyrighted by Financial Elite (http://financialelite.blogspot.com/ ).]

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Should I Get a Loan Or Withdraw From My 401K if I Can't Afford My Mortgage Payment?

I took a 401K withdrawal out when I was getting divorced to pay of my car and get my ex-wife off the title, which she in turn refinanced the house we owned and paid me the equity that was owed to me. But the next year at tax time, guess what? Not only was I $60,000 in debt, but owed $7,500 to the IRS. I needed that like a hole in the head.

So what do I say about 401k withdrawals? Don't do it if at all possible. "Should I take a withdrawal or get a 401K loan?" is one the most asked questions we get. It's understandable you are desperate to hang on to your house and will do anything to avoid having a foreclosure, but I don't think you should do it. You will pay income tax on that money eventually and will probably be hit with a 10 percent penalty for taking the money out before you are 59 1/2. After the money runs out you will probably find yourself right back in the hole. You won't have any more money to take from your 401K and you will most likely fall behind on your mortgage again

A 401K loan can be risky. If you are get laid off you will typically have to repay the loan within a short period of time. With the current economic situation still going strong, there is a chance you may face a layoff. So if you take that loan out and then get laid off and after that you don't have the money to pay back, you will run into a tax problem. The loan will be treated as a withdrawal and you'll have to pay tax and probably a 10% early withdrawal penalty. A loan can also cost you more money because the markets may rally, which they have been doing lately, and if you have a loan out at that time, you will have missed an opportunity to recoup the money you have lost during the down market.

One important fact. The money you have in your 401K and IRA is protected if you ever have to file bankruptcy. You can keep that money no matter what.

If there is anything you can do to NOT take money from 401K please choose that option.

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Should I Take a Loan Out From My 401K to Pay My Mortgage Current?

A 401K loan is no better than a 401K withdrawal when it comes to that scenario. Don't do it. We have discussed taking out loans against your 401K to pay off debt many times before. By taking out a loan means you risk being taxed twice on any funds you withdraw. If you should get laid off you are at risk of having to pay back the loan in a couple of months. With the current economic situation there is still potential for people losing their jobs. You could very well be one of them.

So if you decide to take out a 401K loan and should get laid off and can't pay it back fairly quickly you will run into a tax problem. The loan will then be treated as a withdrawal and you will be stuck paying the 10% early withdrawal penalty (if you are under 59 1/2) and will also have the money taxed as income.

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What Should I Do If I lose My Job? Part 2.

In part 1 of "What Should I Do If I Lose My Job?", we discussed the ugly truth with unemployment being at a high of 9.4% and climbing and you still face a chance of losing your job.

We also looked at several options where you should and should not get funds to make up the difference in your lose of income. Credit cards and home equity loans = Bad. Emergency fund (that's what it's for) = Good. So what other options may good or bad? let's take a look.

If I can't pay my bills can't I use the money I have available in my 401K?


Do whatever you can to avoid tapping into your retirement savings. It may seem like a quick and easy solution to your cash flow problems now, but down the line it can be very damaging to your financial future. You will need that money in the future for your retirement. When you spend what you have today you have less for tomorrow. And when you are older is when you will need it. Don't think you have a long way before retirement or you'll just boost up your savings when you start working again. Most people never do. Also, your new job may not pay as much as your previous one did.


If you feel that pulling the money out of your 401K is your only option than transfer your money into an IRA to prevent paying the 10% early withdrawal penalty. Instead of taking the lump sum you can take it as you need by taking withdrawals from the IRA as you need them. You will only have to pay penalties and taxes on the amount you withdrawal. Try to minimize the the amounts you you withdrawal instead of the whole thing all at once until you go back to work. At least that way you'll salvage some of your retirement.

I don't have any money in savings. What do I do?


I want you to start finding ways to save money right now! This is no joke. Start building an emergency fund. If you don't have an emergency fund you must start taking steps to increase your income and reduce your expenses so you have a savings reserve. There is nothing more important than establishing an emergency fund that can carry you through for at least eight months.

I Can't Afford My Mortgage Payments. Should I Take a Withdrawal or Borrow Money From My 401K?

Resist the temptation to make the withdrawal from your 401K. Many people are doing this these days. I know you may desperate. Especially, if you are falling behind on your mortgage payments or are trying to avoid foreclosure. Do whatever you can to avoid taking a withdrawal or a loan. If you make a withdrawal you will be hit with a 10% penalty for taking money out if you are under 59 1/2. Then a few months later chances are you will find yourself right back in the same hole you were in before. But this time all of your 401K money will be gone and you will undoubtedly fall behind on your mortgage again.

A 401K loan can be just as risky. If you get laid off you will have to pay back the loan within a few months. Unemployment continues to go up and is already at a 26 year high. So, if you get laid off and can't pay back the money, you will most likely have a tax problem. The loan will be treated as a withdrawal and you will be paying tax and a early withdrawal penalty of 10%. A loan also has drawbacks because the markets may rally at any time while you have an outstanding loan, which you are missing an important opportunity to recoup your losses.

Also, you should know any money that you have in a 401K or IRA is protected if you ever file for bankruptcy. That money is yours no matter what.

I think you should search in ever nook and cranny of your financial life and find other income sources for making your mortgage payments.

Should I Use My 401K to Pay Off My Mortgage?

If you are planning on staying in your home I am all for you paying off your mortgage. But if you are getting a company match on your 401K from your employer, you must continue to invest the minimum amount to qualify for the maximum match. This is free money that you should not pass up. What you can do is cut back on your contribution to the point of the match so you will have more money in paycheck to put towards paying off your mortgage before you retire. You are probably thinking, "I will have less money in my 401K if I do that." But if you don't have a mortgage to worry about when you retire then it will probably more than offset the difference. For most retirees mortgages are the biggest income concerns.

Imagine Having a $2 Billion Emergency Fund.

If contributing to your 401K isn't keeping you busy enough. Think about your IRA, savings, credit card debt, and paying down your mortgage. What's left for me after all that? There are a couple of other ways to help you save more money out there. Bank of America customers have saved more than $2 billion with the Keep the Change program.

The U.S. household savings rate in May rose to a 15 year high, according to the latest Commerce department report. Bank of America customers contributed to that rate by using the Keep the Change program as an effortless way way to save while making everyday purchases. In fact, since the program's launch in 2005, customers have save more than $2 billion.

When consumers sign up for the program, every debit card purchase is automatically rounded up to the nearest whole dollar, and the difference is transferred from their checking into their savings account. Bank of America matches 100% of transfers for the first three months and 5% thereafter, up to a maximum total of $250 per year.

"We've seen an incredible impact in our customers' savings as a result of their participation in Keep the Change, especially customers who are just starting to save for the first time," said Jon Wilk, Balances and Rates executive at Bank of America. "Helping customers save more than $2 billion illustrates how change can add up over time."

In addition to Keep the Change, the newly introduced Add It Up program, a secure online shopping site that allows enrolled customers to earn up to 20% cash back on their purchases, is also helping customers stretch their money. By using both Add It Up and Keep the Change, Bank of America customers can receive the combined value of saving while they are spending.

"Even with today's economic environment, consumers are finding ways, to get more from their money, and our innovative Keep the Change savings program is one example of the advantages of being a Bank of America customer," Wilk said.

If you had started the Keep the Change Program when it started you could have potentially built your emergency fund to $1,000 by now. If you you bank with Bank of America and haven't started this program now is the time. Money is being lost. If you don't bank with Bank of America, maybe you should.

My Employer is Reducing or Going to Stop it's Matching Contribution. Should I Stop Contributing to My 401K?

You need to decide how to manage your money best if your employer is no longer going to make matching contributions. If you have credit card debt, you may want to stop your contributions to your 401K so you have a bigger paycheck to put towards paying off your credit card balances. If you don't have credit card debt and don't have at least an eight month emergency fund, be sure to start putting money aside right away. If you don't have any credit card debt and you already have an eight month emergency fund, then the next step would be to stop contributing to your 401K and see if you qualify for a Roth IRA. Since certain income restrictions will prevent you from starting a Roth IRA your next best option would be to open a traditional IRA. If you have already made a contribution to your Roth or traditional IRA you then you can put the extra money towards paying down your mortgage if you think you will be staying in the home for quite some time or just keep contributing to your 401K. Even if you are not getting an employer match, contributing to your 401K is still one of the best ways to save tax deferred towards your retirement.

If My Company Goes Bankrupt Will I Lose All the Money in My 401K?

You should have nothing to worry about if you can confirm your money was sent from your employer to your 401K plan. Any money you invest in a 401K is your money, not your employer's. Generally employers hire a third party like Fidelity or a brokerage, fund company, or insurance company to run the 401K, and that company will separate your money into another account that is all yours; even if that brokerage company gets into trouble.

I am Not Fully Vested in My 401K. Will I Lose Money If My Company Goes Bankrupt?

It is a good chance you will lose your employer matched contributions. If you are not fully vested, the money is not entirely yours. If your company goes bankrupt it has no legal obligation to pay you the unvested portion of your 401K. The money you contribute to your 401K is always 100% yours.

Give a wedding gift they can really use.

With summer in full swing so is wedding season, and the invitations should be piling up on your kitchen table. Now if you are like everyone else that has been to a wedding, you think "what should I get for the bride and groom." Now instead of heading to your local Pottery Barn or Crate and Barrel to buy something off the ever boring bridal registry, why don't you give the couple something that they can really use, time with a financial planner.

Think about it, does the couple really need another picture frame or that set of steak knives? Or could they use some one on one time with a financial guru to help get their marriage off to a great financial start. So many couples do not have the money talk before the wedding and it's so important. Money is the most fought about topic in a marriage and the number one reason for divorce.

There is a down side in giving this gift, most financial planners tend to be more interested in long-term, rather than short-term, relationships with clients. However,
there are some planners willing to consider more flexible arrangements. For example, planners in the Garrett Planning Network will work for a flat fee per project or charge by the hour. Similarly, online services such as MyFinancialAdvice.com allow you to email or phone independent financial planners who are willing to answer questions on a wide range of financial topics. The hourly cost for these types of services varies from planner to planner, but $150 to $200 is typical.

Ideally, of course, you'll also want to find a planner who has experience in dealing with newlyweds and is familiar with the financial issues surrounding marriage and starting a new household. Now, some people might question whether much useful financial planning can get done in the course of a single hour and some might even suggest that giving them a one-hour gift is effectively setting them up to spend money on additional sessions on their own, sort of the financial equivalent of paying for the first book of a 32-volume encyclopedia set.

But I disagree. Granted, no one is going to put the bride and groom on the path to financial bliss in one hour. But a good planner should be able to help them create a budgeting and savings program, set up an emergency fund, get them signed up for 401(k)s and IRAs, suggest a few mutual funds, make sure their beneficiaries are up to date for any investment accounts and insurance policies they may already own, etc. In short, a planner should be able to help get them off to a good financial start.

By giving the happy couple a gift that they can not only use now but that will also pay them dividends in the years ahead you are giving the couple a head start in life as well as love, how many other wedding gifts can you say that about?

The Recession Is Destroying Social Security Even Further!

I can't stress the importance of saving for retirement enough. Chances are one day you will not have social security or pension to rely on. Only what you have saved in the form of 401K's, IRA's, or mutual funds.

The Social Security System will one day run out and the recession is taking its toll on Social Security. On Tuesday, the officials who oversee the program foresee that the Social Security trust fund will be exhausted by 2037 an entire four years earlier then estimated last year.

"When Social Security needs to draw down the 'surplus' the Treasury will have to borrow money, raise taxes or cut other spending in order to redeem the IOU's, said Charles Konigsberg, a federal budget expert at deficit watchdog group the Concord Coalition.

"Despite projection that Social Security can continue to pay full benefits for nearly 30 years, the sooner action is taken the more options for reform will be available and the fairer reforms will be to our children and grandchildren," said Treasury Secretary Timothy Geithner, a managing trustee of the program.

Don't rely on Social Security to be fixed. You must start your retirement savings plan as soon as possible. Check back to Financial Elite post frequently for retirement savings tips.

Should I Use My IRA To Pay For My Childs College Tuition?

We have discussed this before about using your 401K to pay pay for your children's education. You don't want to hit up your retirement funds to pay for other expenses. Again, with social security going away, what are going to live in on? I hope your kids appreciate their college education, because you are probably going to have to live with them if you don't have enough retirement savings. You could also be jeopardizing their chances for financial aid because the withdrawal from your IRA can be treated as part of your income. You could be making too much money, where as you might not have before the withdrawal. Do not use your IRA, 401K, or any other retirement funds to pay for your children's college tuition.

One piece of good news if you go against my advice and make the withdrawal anyway, unlike a 401K withdrawal, you will not pay a 10% early withdrawal fee if you are using to pay your child's tuition. However, you will have to pay income tax on the amount you withdraw. If you have a Roth IRA though, the withdrawal amount will not be taxed. Though earnings made through interest may be taxed. Bottom line don't do it.

If I Shouldn't Take 401K Loan Out To Pay For My Children's Education, How About A 401K Loan?

This is a similar question to the one we answered regarding taking out a 401K loan to pay off credit card debt, with a similar answer...Don't do it. You must resist the temptation to take a 401K loan out to pay for other expenses. In the state of the current economy it is very dangerous to borrow money from your 401K. Although the economy is improving, layoffs are still occurring. A layoff can happen at any time and if it does your loan will be treated as a withdrawal. You will have to pay income tax on the entire amount you borrowed and if you are under 59 1/2 you will have to pay a 10% early withdrawal on top of it. If you need money for college, federal student loans are your best bet.

Should I Stop Contributing To My 401K To Start Saving For College For My Children?

We discussed a similar question about stopping contributions to your 401k's to pay off credit card debt. I know you love your children and want the best for them. This is going to sound selfish, but you should not stop contributing to your 401k to fund your children's college education.

If you are looking for additional funds to pay for your children's education then it is obvious that you probably don't have an emergency fund either. Right now in the current state the economy is in, it is imperative to have an emergency fund of least six to eight months of expenses.

Again I know you want your children to be able to live up to their full potential, but jeopardizing your financial security is not the way to do it. Also in this point in time, your 401K has probably taken a beating. When people's investments tank their instincts tell them to run, but this is not the time to run. It is the time to stand and fight. You need to keep your money in your 401k and continue to invest even though it doesn't seem like the right thing to do. I am assuming that you have at least ten years until you retire. The reason I am telling you to keep your money in your 401K is this: When the market is down you are able to buy more shares of what you are investing in, and the more money you will make when the stock market goes back up.

Also, you are going to need as much money as you can get your hands on when you retire. With the threat of social security being gone one day your 401k, IRA's, and cash savings will be all that you will have to rely on. If you don't have retirement savings you may one day be a financial burden to your children. So unless you want to work for the rest of your life or live with your children after retirement don't withdrawal funds from your 401k to pay for your children's education. I am not telling you to leave your children high and dry without an education. There are several federal loan programs to choose from, whether it be the military, employer tuition assistance, or loan forgiveness programs to pay for a college education.

Should I Stop Contributing To My 401K If I Want To Pay Off My Credit Cards?

Not really. Especially if your employer offers a company match. No matter how much credit card debt you have or how out of whack your finances are. Don't miss out on this free money. No matter if your employer matches dollar for dollar, matches half of what you contribute, or matches even a quarter of what you put in, you don't want to pass this up.

Should I Take Out A 401K Loan To Pay Off My Credit Cards?

I have taken out 401k loans before but, I have taken them out to use as down payments for buying homes. All in all no matter what you take the 401k out for the concept is the same.

Unless you are not able to make your credit card payments at all and your FICO credit score is in jeopardy, this might not be a good idea right now. Be aware you can end up paying taxes twice on the money you borrow. If your FICO credit score has already gone bad due to late payments and your interest rate has sky rocketed to 30%,a 401K loan might be looking pretty good and you might think the tax penalty may be worth it.

The problem is we are in the middle of a recession. There is a possibility that you may loose your job. I have friends who have been with their company for years, In some cases over fifteen years, who have lost their job. No matter how much seniority you have you can still get laid off without any warning. If you were to be laid off and you have an outstanding 401k loan, you will have to repay the loan within a short period of time. Typically the time frame is 90 days. If you don't pay it off within that time frame your 401K loan will become a 401K withdrawal. This means you will have to pay tax on the entire amount. On top of that you will have a 10% early withdrawal penalty if you are under 55 when your service ends. Would you be able to pay back the 401K loan if that were to happen? You certainly wouldn't be able to take it from a credit card would you?

Something else to consider is your retirement. If you no longer have a your 401K, what else do you have for retirement? If retirement isn't on your mind it needs to be. If you can't pay your credit cards you may be thinking of bankruptcy. There are other options before things go that far, but the good thing with bankruptcy is(if there such a thing when it comes to bankruptcy)the money in your 401K or IRA is protected under bankruptcy law. You will not be required to payoff your credit card debts with your retirement savings. Don't blow your retirement on paying off your credit card debt.

Should I Stop Contributing to My 401K To Pay Off My Credit Cards

Only after you have reached the maximum employer match. Once you have reached the point where you have maxed out your employer's matching contribution then yes, you should without a doubt stop contributing so have can have more money in your paycheck to put towards paying off your credit cards. Be sure to check with your human resources department to help you figure out the max amount you need to contribute to your 401K in order to receive the full company match.