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401K Legislation

Discussion in 'Politics, Elections & Legislation' started by otnot, May 22, 2011.

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  1. otnot

    otnot Active Member

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    You might want to read this article. It seems our government is getting ready to pass legislation to limit how much you can borrow from your IRA and 401k. It's the last of the money they can steal from us.

    Jim
     
  2. trapshooterjoe7

    trapshooterjoe7 Member

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    I have been doing some thinking on drawing some of my 401k, paying the tax and investing in the fourx mkt, i have been making 6-8% a month in fourx a month, which is way better than any fund in my 401K. Any investment gurus out there??Joe
     
  3. dmarbell

    dmarbell Active Member

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    That is called a "Wall of Text." Can someone summarize?

    Danny
     
  4. otnot

    otnot Active Member

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    Physical gold and silver.
     
  5. AEST BOSS

    AEST BOSS Member

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    Or canned food and ammo....
     
  6. GBatch_25

    GBatch_25 Active Member

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    Oh please. Not saying it could never happen BUT please read the name of the website. then ask yourself what are they selling and why. The only people making money buying gold are speculators.

    Gene Batchelar
    Wheaton, IL
     
  7. Joe Potosky

    Joe Potosky Well-Known Member

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    8 Reasons To Never Borrow From Your 401(k)

    Nearly 20% of 401(k) plan participants who are eligible to take loans against their retirement savings exercise this option, according to 2008 data from the Employee Benefit Research Institute. This number has remained stable since the early 2000s.

    The average outstanding loan balance was 16% of assets. For plan participants in their 20s, the number is much higher, coming in at 29% of their savings, a percentage that drops as participants age, falling to 25% for those in their 30s, 18% for those in their 40s and 13% for those in their 50s. The figure is just 11% for those in their 60s. While it's great that older workers tend to borrow less, dipping into your 401(k) plan at all is a bad idea.

    In this article, we'll go over eight major reasons why you should focus on keeping your 401(k) plan until retirement, rather than using it as a piggy bank.

    Why Borrowing Is a Bad Idea

    Pundits claim that your 401(k) balance is a less expensive way to borrow money because the interest rate charged is generally lower than the rates on a commercial loan. They also cite the fact that when you repay the loan, you are paying yourself back with interest, instead of paying a bank. Despite these claims, borrowing from your 401(k) goes against almost every time-tested principal of long-term investing. There are eight major reasons why this type of thinking is short sighted:


    Watch: Introduction in 401(k)


    1. You Are Not Saving


    If you borrow money from your 401(k) plan, most plans have a provision that prohibits you from making additional contributions until the loan balance is repaid. Even if your plan doesn't have this provision, it is unlikely that you can afford to make future contributions in addition to servicing the loan payment. Because the whole point of having a 401(k) plan is to use it is as a way to save for the future, you are defeating the purpose of having this account if you use it before you retire.

    2. You Are Losing Money

    If you not are not making contributions, not only is the entire balance that you borrowed missing out on any potential growth in the stock or bond markets, but each future contribution that you are unable to make (since you have a loan outstanding) isn't growing either. The extraordinarily low interest rate that you are paying to yourself with your loan payment is likely to be a pittance in terms of return on investment when compared to the market appreciation that you are missing. Of course, there's also the fact that you are paying yourself back with after-tax money. If you are in the 25% tax bracket, earning $1 only gives you $0.75 toward repaying the loan, and that $0.75 will be taxed again when you retire and withdraw if from your plan. While the interest rate on the loan may be low, you are getting taken to the cleaners by its tax implications.

    3. Time Will Work Against You

    Long-term investing (such as saving for retirement) is based on the idea that, by putting time to work on your behalf, your money will grow. Most calculations suggest that your money will double, on average, every eight years. 401(k) plans permit each loan to be held for up to five years or longer. Therefore, if the loan is used to fund a first-time home purchase, loan holders not only lose out on what should have been an opportunity to nearly double their money, but they are also left unable to make up for the lost contribution and growth opportunities. Over time, their balance is unlikely to ever reach the total that it would have reached had contributions continued uninterrupted.

    4. If Your Financial Situation Deteriorates, You Could Lose Even More Money

    Should you find yourself in a position where you are unable to repay the loan, it is treated as a withdrawal and the outstanding loan balance will be subject to current income taxes in addition to a 10% early withdrawal penalty if you are under age 59.5.

    5. You Are Trapped

    If you have an outstanding loan, most plans require that the loan be immediately repaid if you quit your job. So, as long as you have a loan, you are stuck in your current job and may be forced to pass up a better opportunity should one come along, unless you are willing to take the loan balance as a withdrawal and pay the 10% penalty, which further compounds the growth opportunities that you have missed by taking the loan.

    6. You Lose Your Cushion

    Taking a loan from your 401(k) plan should only be done in the direst of circumstances, after you have completely exhausted all other potential sources of funding. If you take money from your plan to fund a vacation or pay off higher interest loans, the money won't be there to borrow if you really need it.

    7. It Suggests That You Are Living Beyond Your Means

    The need to borrow from your savings is a red flag - a warning that you are living beyond your means. When you can't find any other way to fund your lifestyle than by taking money from your future, it's time for a serious re-evaluation of your spending habits. What purchase could possibly be so important that you are willing to put your future in jeopardy and go into debt in order to get it? (For more insight, see Digging Out Of Personal Debt and The Beauty Of Budgeting.)

    8. It Violates The Golden Rule of Personal Finance

    "Pay yourself first" is the golden rule of personal finance. Violating that rule is never a good idea.

    Think First

    If the idea of taking a loan from you 401(k) plan crosses you mind, stop and think before you act. Instead of short-changing your future to finance your lifestyle today, consider re-evaluating your current lifestyle instead. Scaling back on your expenses will not only reduce the burden on your wallet, but will increase the odds that a sound retirement nest egg will be waiting for you in the future.



    --------------------------------------

    401K investment options.

    How your money is invested will have an enormous impact on your return, so it is essential to know your options and educate yourself in order to make sound and comfortable choices. The truly great feature of a 401K plan is the fact that you can divide your money, putting it into different financial vehicles, thus balancing the investment risks and the relative certainty that some options may provide.

    Fixed Funds.

    Fixed Funds, sometimes called Guaranteed Funds, are known for steady, predictable growth in the long term. They carry Guaranteed Interest Contracts underwritten by insurance companies, and because of that fact are commonly considered very low risk funds. But low risk also means low, fixed interest rates, and when offset with inflation – small growth.

    Mutual Funds.

    Mutual Funds are really great investment options designed to reduce risk. They allow small investors to put their money in stocks, bonds and other various instruments. An average 401K will offer at least a few mutual funds in which you can invest. In general, you can further divide this form of investing into the following categories:

    - money market funds are considered very low risk and have very low return. They use Treasury bills, certificates of deposit and other instruments. Sometimes, the return on these investments is less than inflation.

    - growth funds select companies which have strong growth potential, but have not proven to be highly profitable by paying dividends.

    - aggressive growth funds invest in usually small companies, which have a great potential for growth. The possibility of a high return comes with high risk investments.

    - international funds invest in companies outside the United States. These investments carry a risk of currency exchange rates, economic and political conditions in other countries and are commonly believed to have the greatest potential for a high return.

    Company Stocks.
    Single company stocks (including a company you work for) always represent a greater risk than any other kind of investment; thus it should be only a small fraction of your overall 401Kinvestment.

    401K plans are not insured by the federal government, and their investments, whatever they might be, carry different degrees of uncertainty. It is always advised by financial specialists to diversify your investments by investing in different types of assets.

    To find out more about mutual funds and other 401K investment options; ask your plan administrator for information. Financial magazines, prospectus and brochures also can be good sources for learning about particular investment options.
     
  8. kfbagt

    kfbagt Member

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    The article above is mainly discussing options you may have available by a corporate provided 401k. If you are a private investor or are self employed and you find yourself considering borrowing from your IRA or you have a 401k that will allow you to take distributions then you must consider the federal penalties that will apply. If you have put money away that was pretax and you now take a distribution the funds will be subject to an early withdrawal penalty of 20% (if you are not eligible for retirement age distributions). So whatever you are investing in will need to earn at least a 20% return just to break even. Some corporate 401k plans will let you borrow against the funds at a preset interest rate, therefore avoiding the federal penalties but charging you interest, so your investment needs to out earn the interest charges or you are losing money.

    The IRS also changed the laws three years ago on MEC's (modified endowment contracts), and in some situations distributions from a retirement plan offered by your employer may be considered a MEC and can be subject to higher penalties.

    Be sure to check with a qualified accountant before making any moves that involve your qualified retirement accounts or you may be in for a big surprise when it comes tax time.

    Paul
     
  9. cnsane

    cnsane Member

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    One of the most financially astute persons I have ever listened to said,"Take as much money out of your 401 as you posibly can and use it to buy land. That way, after the govt. eff's you the way they did GM stockholders, you've still got land. While everyone else is becoming millionaires on paper, you'll have a tangible asset and they will have a govt. IOU worth appx. the same value as GM stock." He is a rags to riches self made millionaire who did it all with hard work and financial savvy. And he is usually not wrong.
     
  10. Joe Potosky

    Joe Potosky Well-Known Member

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    When you get to retirement age and find you can't retire because you borrowed from your IRA....

    For every person that makes big bucks by messing around with an IRA, 1000 will still be working at 70, as they messed up there retirement nest egg!

    You better really know what your doing or your going to find that trap shooting is not a hobby you can afford in the golden years...
     
  11. bigdogtx

    bigdogtx Well-Known Member

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    kfbagt,,,,you are not allowed to borrow from an IRA,,,that would be considered a distribution and would be taxed and possibly penalized.....
     
  12. kfbagt

    kfbagt Member

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    Right, that was my point.
     
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