Why Is It A Bad Idea to Take a Loan from My 401(k)?

Generally, it’s a really bad idea to take a loan from your 401(k).

Wealth Advisor’s recent article, “Why You Shouldn’t Take A 401(k) Loan,” lists some of the reasons why.

Many people who borrow from their 401(k)s wind up lowering or completely stopping their contributions, while they’re paying back the loans. This can mean the loss of 401(k) matching contributions, when their contribution rates fall below the maximum matched percentage.

Most people thinking about changing jobs don’t know that their outstanding 401(k) loan balance becomes due, when they leave their employer. Whether a job change is voluntary or involuntary, who among us has the financial resources available to pay back a 401(k) loan right away, if we leave our employer? As a result, many individual default.

However, the new tax law gives a little cushion, and you have until your tax return due date the next year. Plan balances that leave 401(k) plans due to loan defaults are rarely ever made up. That makes it less likely that loan defaulters will build sufficient retirement savings.

When you take a loan, it becomes one of your investments in your 401(k) plan account. If you were to take a $10,000 loan for five years at a 6% interest rate, that portion of your 401(k) balance will earn a 6% return for five years.

However, if your loan balance had been invested in one of the other investment options in your plan, you may have earned a lot more. Instead, look into taking a home equity loan first, because interest on those loans is tax-deductible.

Easy availability of a 401(k) loan can frequently make a bad financial situation worse. It can push you into bankruptcy and/or resulting in the loss of your home.

It is clear that 401(k) loans can significantly reduce your chances of achieving retirement preparedness.  It is also one of the worst investments you can make in your 401(k) account.

Reference: Wealth Advisor (February 4, 2019) “Why You Shouldn’t Take A 401(k) Loan”

Suggested Key Terms: 401(k), Financial Planning

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This is the Year to Complete Your Estate Plan!

Your estate plan is an essential part of preparing for the future. It can have a dramatic effect on your family’s future financial situation. Estate planning can also have a significant impact on your tax liability immediately. Utah Business’s article, “5 Estate Planning Tips For 2019,” helps us with some tips.

Your Will. If you have a will, you’re ahead of more than half of the people in the U.S. Remember, however, that estate planning isn’t a one-time thing. It’s an ongoing process that requires making sure your plan reflects your current wishes and financial situation. You should review your will at least every few years. However, there are also some life events that should trigger a review, regardless of when the last review occurred. These include marriage, divorce, the birth or adoption of a child or grandchild, an inheritance, a large financial loss and the loss of a spouse.

A Trust. Anyone can create a trust, and it has real estate planning advantages. You can use a trust to pass assets to heirs and other beneficiaries, just like you could with a will. However, assets passed through a trust don’t need to go through probate. Using a trust to transfer assets provides privacy.

The Current Tax Breaks. The 2017 Tax Cuts and Jobs Act gives us some significant tax cuts in 2019, such as a temporary doubled lifetime exclusion for the gift and estate tax, temporary exemptions from the generation-skipping transfer tax, higher annual gift limits and charitable contribution deductions. To see if you can use of any of these tax benefits, speak to an experienced estate planning attorney.

Talk to an Attorney for a Review of Your Estate Plan. It’s important to remember that estate planning is complicated. You should, therefore, develop a comprehensive estate plan with the help of an experienced attorney. Don’t be tempted to use an online legal do-it-yourself service to save a few dollars, because any mistakes you make could have a big impact on you and your family’s financial future.

Every state has its own laws regarding the formalities required to create a valid will. If you fail to follow any of these, a court may declare your will invalid during probate. Your entire estate will then be distributed according to the laws of intestate succession. These laws may not reflect your wishes for the distribution of your estate. Meeting with an attorney will make certain that your estate planning documents are in order. It will also help you to identify your goals and ensure that your assets are protected and transferred in the most efficient way possible.

Reference: Utah Business (February 5, 2019) “5 Estate Planning Tips For 2019”

Suggested Key Terms: Estate Planning Lawyer, Wills, Trusts, Probate Court, Inheritance, Intestacy, Tax Planning

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Being Forward-Thinking About Assisted Living to Avoid a Crisis

We always think there will be time to plan for assisted living, until something happens and then we are facing an emergency. When a loved one is discharged from the hospital and can’t return home, there’s little or no time to find the right place for them to live. As Next Avenue advises in the article “Planning Ahead for Assisted Living,” don’t wait for the emergency.

Many people deal with assisted living this way. Adult children uproot their lives and relocate to be near their aging parents. Spouses feel helpless when their husbands or wives refuse to even consider moving to a facility, yet they are not safe at home.

The senior often pushes back against leaving their home, which is understandable. However, when illness or aging takes a toll, it’s just a matter of time before they understand, usually the hard way.

One woman was the very model of aging-in-place, until turning 85. Then illnesses and a chronic condition started making it hard for her to move around. When she was taken to the hospital, she had to take a clear look at her situation. It was distressing, but she realized she had to make a change.

By 2030, the number of Americans age 65 and older is expected to increase dramatically, and for the first time in our country’s history, the number of older Americans will be higher than the number of children.

We may not know what life has in store for us. However, we can plan ahead.

Some people start looking at CCRCs–Continuing Care Retirement Communities. These are facilities that include independent living, assisted living and nursing home care, all on the same property. Some have secured memory care for those living with dementia.

Research the costs, policies, and programs of the long-term facilities you may be considering. There are different services offered. Assisted living facilities are state-licensed housing communities that offer residents a range of services. They usually do not offer medical care. A skilled nursing facility/nursing home will have medical services.

Services in assisted living communities vary. Some offer meals and help with bathing, dressing and mobility, medication management, education and social activities. They may be large or small, with residential homes, where three or four residents live with a paid caregiver. Those are known as “adult foster homes.” Others are “assisted living homes,” which usually have 10 or so residents. In these facilities, the caretakers don’t live in the house, but 24-hour care is provided.

Here are some questions to ask, when visiting assisted living communities:

  • Is the facility clean? Does it smell?
  • What is the culture and atmosphere of the place?
  • Are the residents and employees smiling, or does everyone look downcast?

It is recommended that people visit the facility several times, at different times, to get a better sense of the facility.  You should also eat in the dining room a few times. Are people friendly? How is the quality of the food? Set up a meeting with the people who run the facility and your family members.

Don’t dismiss the concerns of your loved ones when visiting facilities. They need to be comfortable, and it’s very important for them to have a voice in making this decision.

Reference: Next Avenue (Jan. 21, 2019) “Planning Ahead for Assisted Living”

Suggested Key Terms: Assisted Living Facility, Skilled Nursing, Continuing Care Retirement Communities, CCRC, Residents, Caretakers

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