Cracking Your Nest Egg

It can be disastrous to your retirementprospects to treat your 401(k) or 403(b) retirement savings plan as a piggy bank. Yet, if you find yourself facing a true financial emergency, raiding the plan or, better, taking out a loan against your assets in the plan, could be your best option. There are, however, sound arguments against using these funds for anything other than your retirement. If you're still tempted to tap into these resources, it’s wise to consider all the potentially negative consequences.

First, if you decide to withdraw funds from your traditional 401(k) or 403(b) account, by cashing it out, you’ll have to pay a 10% penalty (if you’re not at least 59½) on the amount withdrawn as well as the income tax (the funds were accumulated with pre-tax income) due on the amount. Someone in the 25% federal tax bracket taking out $50,000, for example, would have to pay $12,500. Then subtract state tax due (at 7%, that’s another $3,500). If you have to also subtract a 10% penalty ($5,000), you can see that your $50,000 in retirement savings has suddenly become $29,000. It’s easy to understand why the general advice is almost always solidly against doing this.

You can avoid the 10% penalty – but not your tax obligations – if your plan allows, and you prove the need for, hardship redemptions. The IRS defines these as certain medical expenses; costs relating to the purchase of a principal residence; tuition and related educational fees and expenses; payments necessary to prevent eviction from principal residence or a foreclosure; and burial or funeral expenses.

Lending to Yourself

If you really need the cash, you may be better served by using your account as an asset you can borrow against.

First, you would need to find out whether your employer’s plan allows loans. If it does, you can borrow up to 50% of your vested account balance or $50,000, whichever is less. Commonly, you’ll have up to five years to repay the loan, longer if you're borrowing to finance a first home (if the plan allows this). You can expect to pay loan origination and other fees.

If you take this option, you’ll be signing an agreement spelling out the loan’s terms and interest rates. You may have to wait for loan approval, and, if you’re married, your spouse may be required to agree to the loan. You’ll be paying yourself back the principal as well as the interest, so this may seem like a sweet deal until you begin to calculate the potential damage to your retirement plan.

Loan Disadvantages

For a start, you’ll be paying back the loan (principal and interest) with after-tax dollars, which will be taxed yet again when you withdraw the funds in retirement. Furthermore, the interest on such loans is not tax deductible, unlike a regular mortgage or home equity loan.

If you can’t or don't pay the loan back, after its term expires the outstanding balance will be subject to state and federal income taxes plus a 10% IRS penalty. If you were to lose your job, you probably would be asked to pay back the loan within 60 days or suffer tax and penalty consequences.

And there are far greater costs possible to your retirement plan. You’ll be dramatically slowing the growth of your retirement account, and even if you complete paying back the loan with interest, the account may well fall short of what it could have earned if left alone to compound over the term of your loan. Typically, in order to repay these loans, borrowers cut back on the contributions they otherwise would have made, which means a smaller account total when they retire. And unless your account was immune from the market turmoil of the past two years, you could be locking in investment losses if you withdraw funds while the market is still recovering.

True, your retirement plan savings are yours to do with as you wish, but you can appreciate why withdrawing or borrowing from them is discouraged.

Tapping into Social Security Benefits for Minors

Many think of Social Security benefits primarily as a piece of the retirement income puzzle, but it may be worth knowing, if you are the guardian of an eligible minor, that he or she may be entitled to receive certain benefits. The two most common types of benefits available to children are survival and disability.

In most cases, a dependent child of a parent who dies becomes eligible to receive benefits as long as the parent had at least 10 years of qualifying work history and the child is 18 or younger – or as old as 19 if unmarried and attending high school full-time. Factors such as the child’s current and former marital status and income are considered when determining eligibility for survival benefits. Adopted children and dependent grandchildren may also qualify for these benefits.

Disability for Minors

Minors who become disabled may be eligible to receive Supplemental Security Income (SSI) benefits until they reach age 22. Eligibility is contingent upon a number of elements, including the severity of the disability, how long it is anticipated to last, and the custodial family’s household income and resources.

Social Security determines childhood disability based on the following criteria:

| The child must have a physical or mental condition(s) that very seriously limits his or her activities, and

| The condition(s) must have lasted, or be expected to last, at least one year or result in death. In addition to considering the income level of a child’s family, in determining payment levels,

Social Security may factor in any job earnings a minor is receiving. However, only a small portion of those earnings are typically counted, and certain work-related items and services are subtracted all together. Also, a child age 15 or older can establish a Plan to Achieve Self-Support (PASS), which allows him or her to set aside SSI-exempt income to help achieve certain types of work goals.

Additional information on Social Security benefits for minors, including instructions on how to begin the application process, can be found at ssa.gov.

If you need more information about Social Security benefits for minors, I’ll be happy to assist. Just give me a call.

Electronic Element Invades Modern Estate Plans

While there are exceptions, especially among seniors, most people in today’s digital world are managing most, if not all, of their financial lives on the Internet. And why not? The management tools available and the networking offered in this virtual world are both convenient and powerful. Paying a bill on time no longer requires postal workers to keep their oath. In addition to handling finances, many are building second lives online, even if they don't maintain a blog or Facebook page.

There is an important electronic wrinkle in all this activity, of course. If you bank, pay bills or check your stock portfolio online, you are undoubtedly maintaining any number of private usernames and passwords. As scammers have proliferated, banks, credit card companies and many others have established series of “security questions” that probe far beyond your mother’s maiden name (an early standard). You may book airline flights, store personal photos, purchase services and products, and keep web-based e-mail accounts through a large number of service providers. Each account needs a password and/or personal ID number (PIN).

All this private information will be vital to your beneficiaries. But, how do you keep it all private until the moment when it should be passed along?

Access Denied!

For very good security reasons, the executor or beneficiary who tries to access your information will likely be blocked by the website’s privacy wall. He or she might need a specific order from a judge to obtain access – that’s the case with many credit card companies. For an executor of an estate, the entire process of gaining access and managing all these online accounts can be time consuming and expensive.

There are several ways to make sure your passwords are passed on safely. Simplest, perhaps, is to give the executor of your estate the information either on a paper document or electronically.

With a comprehensive list of your online accounts, passwords, PINs, security question answers and any other information relevant to a particular provider, the executor probably will have enough information to execute your will.

Safe Deposit Box?

Another option is to keep the information in a safe deposit box, a key to which is held by the executor. It’s wise to arrange with the bank the circumstances under which someone other than you may access your safe deposit box.

You could choose an online service. Several companies operate websites (see accompanying story below) that, for a fee, will store your account information, PINs, passwords and other relevant online access information. These services have clearly defined procedures that allow distributing information to beneficiaries after your death.

You’ve devoted a lot of thought and time to protecting your accounts and password information. It makes sense to ensure your estate plan contains a methodology of passing along access to your vital accounts.

If You Wish to Store Vital Information Online

Instead of handing your key electronic information over to a friend, relative or attorney, you may wish to choose an impersonal online service that will securely store your usernames, passwords and other private information until the time comes to pass them along.

Deathswitch.com is an online version of the dead man’s switch in locomotives – it automatically brakes the train if an actively held connection is interrupted. Deathswitch sets up a schedule that regularly prompts a password from you. If you fail to respond, e-mails go out automatically to your designated recipients. The site offers a free single message; it charges $19.95 annually to store up to 30 messages, each of which may list up to 10 recipients. Attachments can include pictures, videos, scanned documents or plain text.

LegacyLocker.com offers storage of all account and password information. Release of this information requires two verifications of a death, after which account access information is sent to your designated beneficiaries. Accounts served include e-mail, social networking, online retail and any other personal accounts. The company also offers farewell messages that will be sent upon death. An unlimited number of accounts, beneficiary information and legacy letters may be stored for a one-time fee of $299.99 or an annual fee of $29.99.

Assetlock.net requires you to designate the person or persons who will be allowed to open your account in which you have placed digital copies of important documents, final letters, safe box key location, insurance policies or information you kept secret, such as lock combinations. You're also asked to designate the number of persons required to verify your death. The cost for the service starts with a basic package of 20 entries and 20 megabytes of storage for $9.99 a year and ranges to unlimited entries and 20 gigabytes of storage for $79.95 annually.

Dangerous Pursuit:
Chasing Recent Market Winners Can Dent Your Portfolio

It has been shown time and again that investors are inclined to display the kind of herd instinct that can damage portfolios. Often, it takes the form of seeking out the most recent “winners” – winning equities, mutual funds, market sectors – then jumping right in.

Choosing your investments according to well-advertised past market success is to act after the fact. No one knows, except in hindsight, which investments will rise to the top when measured by quarterly or annual performances. If you decide to invest in yesterday's stars, you are putting your money on last year’s winners. Investors who do this are possibly setting themselves up for the very unpleasant experience of buying high and selling low.

Cautionary tales abound. Consider emerging-market stocks, for example, the great stars of the financial markets from 2005 through most of 2007. Investors who learned about this too late invested just in time for the meltdown of the sector in 2008, when, as a group, they lost more than half their value.

There are sound reasons to periodically reevaluate and make changes to your portfolio – and excellent reasons to resist any that seem to be driven by nothing other than market movements.

Investment Myth:
Buy on the Dips? Proceed with Caution

During general market upswings, it’s common for investors to consider buying a stock when its value dips, on the expectation that it will quickly bounce back. Unless you've done your research, however, this can be a very dangerous move. There may be a compelling underlying reason why that stock lost value. Some never recover.