Tag Archive Emergency Fund

ByCurtis Watts

10 COVID-19 Stimulus Benefits for the Self-Employed

Since the outbreak of the coronavirus pandemic in March 2020, life and business certainly have changed. If you’re self-employed full-time or earn business income on the side of a day job, you may be wondering what economic relief applies to you.  

Let's review what relief Congress passed to help self-employed Americans cope with financial challenges. I’ll review ten key stimulus benefits that apply to solopreneurs and small businesses.

If you're experiencing economic hardship due to the coronavirus, using some of these new regulations may be the ticket to managing your personal and business finances better.

10 ways the self-employed can get financial relief

The Coronavirus Aid, Relief, and Economic Security (CARES) Act became law on March 27 as the largest stimulus legislation in American history since the New Deal in the 1930s. Here are ten ways it provides relief for individual solopreneurs and small business owners.

1. Getting lower interest rates

On March 3, the central U.S. bank, also known as the Federal Reserve or Fed, made a surprising emergency interest rate cut of half a percentage point. That’s the largest single rate cut since the financial crisis of 2008. While this move wasn’t part of a coronavirus stimulus package, it was an aggressive cut meant to prepare the economy for problems the pandemic was expected to cause.

An economic recovery could take a few years, which likely means the Fed rate will stay near zero through 2023.

In mid-September, the Fed reiterated its promise to keep interest rates near zero until the economy improves and the unemployment rate declines. They indicated that a recovery could take a few years, which likely means the Fed rate stays near zero through 2023.

While savers never celebrate low interest rates, they're beneficial to borrowers. In general, the financing charge on variable-rate credit cards and lines of credit goes down in lockstep with interest rates. Carrying a balance on your personal and business credit cards may be slightly less expensive, depending on your card issuer and type. For instance, if your card’s annual percentage rate or APR is 20%, your adjusted rate could go down to 19.5%.

If you have a fixed-rate credit card, the APR doesn’t change no matter what happens in the economy or with federal interest rates. Also, note that if you pay off your balance in full each month, a credit card’s APR is irrelevant because you don’t pay interest on purchases.

2. Having more time to file taxes

Earlier this year, the due date for filing and paying 2019 federal taxes was postponed from April 15, 2020, to July 15, 2020. You didn't have to be sick or negatively impacted by COVID-19 to qualify for this federal tax delay. It applied to any person or business entity with taxes due on April 15, 2020.

If you missed the tax filing deadline, be sure to request an extension.

Most businesses make estimated tax payments each quarter. Those payment dates have shifted, too. The 2020 schedule gives you more time as follows:

  • The first quarter was due on July 15, 2020, which changed from April 15, 2020
  • The second quarter was due on July 15, 2020, which changed from April 15, 2020
  • The third quarter was due on September 15, 2020
  • The fourth quarter is due on January 15, 2021

Individuals and businesses can request an automatic extension to delay filing federal taxes. But it doesn’t give you more time to pay what you owe for 2019, only more time to submit your tax form—until October 15, 2020.

If you missed the tax filing deadline, be sure to request an extension. Individuals must file IRS Form 4868, and most incorporated businesses use IRS Form 7004.

However, depending on where you live, you may have to pay state income taxes, which have not been postponed. If you need a state tax filing extension, check with your state’s tax agency to determine what’s possible.

Taxes due on any date other than April 15, 2020—such as sales tax, payroll tax, or estate tax—don’t qualify for relief.

3. Getting more time to contribute to retirement accounts

You typically have until April 15 or the date of a tax extension to make traditional IRA or Roth IRA contributions for the prior year. But since the CARES Act postponed the federal tax filing deadline, you also have until July 15 or October 15, 2020 (if you requested an extension) to make IRA contributions for 2019.

However, this deadline doesn't apply to retirement accounts you may have with an employer, such as a 401(k). Nor does it apply to self-employed accounts, such as a solo 401(k) or SEP-IRA, which correspond to the calendar year.

4. Getting more time to contribute to an HSA

Like with an IRA, you typically have until April 15 or the date of a tax extension to make HSA contributions for the prior year. Under the CARES Act, you now have until July 15 or October 15, 2020, to make HSA contributions for 2019.

To qualify for an HSA, you must be covered by a qualifying high-deductible health plan. In early March, the IRS issued a notice that a high-deductible health plan may cover COVID-19 testing and treatment and telehealth services before meeting your deductible. And just as before the coronavirus, you can pay for medical testing and treatment using funds in your HSA.

5. Delaying tax on retirement withdrawals

While you typically must pay income tax on retirement account withdrawals that weren’t previously taxed, the good news is that for a period, you can delay or avoid tax altogether. The CARES Act gives you two options for withdrawals made in 2020:

  • Repay a hardship distribution within three years to your retirement account. You can replace the funds slowly or all at once, with no change to your annual contribution limit. If you take money out but return it within three years, it’s like you never took a distribution.
  • Pay taxes on a hardship distribution from your retirement account evenly over three years. If you can’t pay back your distribution, you can ease your tax burden by paying one-third of your liability for three years. 

Since withdrawing contributions from a Roth retirement account doesn’t trigger income taxes, it’s a good idea to tap a Roth before a traditional retirement account when you have the option.

6. Skipping early withdrawal penalties

Most retirement accounts impose a 10% early withdrawal penalty if you take make withdrawals before age 59.5. Under the CARES Act, if you have a coronavirus-related hardship, the penalty is waived.

Under the CARES Act, if you have a coronavirus-related hardship, the penalty is waived.

For instance, if you, your spouse, or a child gets diagnosed with COVID-19 or have financial challenges due to being laid off, quarantined, or closing a business, you qualify for this penalty exemption. You can withdraw up to $100,000 of your retirement account balance during 2020 without penalty. However, income taxes would still be due in most cases.

The no-penalty rule applies to workplace retirement plans, such as 401(k)s and 403(b)s. It also applies to IRAs, such as traditional IRAs, Roth IRAs, and SEP-IRAs.

Since you make after-tax contributions to Roth accounts, you can withdraw them at any time (which was also the case before the CARES Act). However, the earnings portion of a Roth is subject to income tax if you withdraw it before age 59.5.

7. Getting larger retirement plan loans

Some workplace retirement plans, such as 401(k)s and 403(b)s, permit loans. Typically, you can borrow 50% of your vested account balance up to $50,000 and repay it with interest over five years.

You can delay the repayment period for a retirement plan loan for up to one year.

For retirement plans that allow loans, the CARES Act doubles the limit to 100% of your vested balance in the plan up to $100,000. It applies to loans you take from your account until late September 2020, for coronavirus-related financial needs.

You can delay the repayment period for a retirement plan loan for up to one year. For example, if you have $20,000 vested in your 401(k), you could take a $20,000 loan on September 30, 2020, and delay the repayment term until September 30, 2021. You’d have payments stretched over five years, ending on September 30, 2026. Any amount not repaid by the deadline would be subject to tax and a 10 percent early withdrawal penalty.

Note that individual retirement accounts—such as traditional IRAs, Roth IRAs, and SEP-IRAs—don’t allow participants to take loans, only hardship distributions.

8. Suspending student loan payments.

Starting on March 13, 2020, most federal student loans went into automatic forbearance until September 30, 2020, due to the CARES Act. On August 8, the suspension of student loan payments was extended through December 31, 2020.

On August 8, the suspension of student loan payments was extended through December 31, 2020.

The suspension covers the following types of loans:

  • Direct Loans that are unsubsidized or subsidized
  • Direct PLUS Loans
  • Direct Consolidation Loans
  • Federal Family Education Loans (FFEL)
  • Federal Perkins Loans

Note that FFEL loans owned by a private lender or Perkins loans held by your education institution don’t qualify for automatic forbearance. However, you may have the option to consolidate them into a Direct Loan, which would be eligible for forbearance. Just make sure that once the suspension ends, your new consolidated interest rate wouldn’t rise significantly.

During forbearance, qualifying loans don’t accrue additional interest. Even if you have federal student loans in default because you haven’t made payments, zero percent interest applies during the suspension period.

Additionally, missed payments during the suspension don’t get reported to the credit bureaus and can’t hurt your credit. Qualifying payments you skip also count toward any federal loan repayment or forgiveness plan you’re enrolled in.

However, if you want to continue making student loan payments during the suspension period, you can. With zero percent interest, the amount you pay gets applied to your principal student loan balance, enabling you to get out of debt faster.

With zero percent interest, the amount you pay gets applied to your principal student loan balance, enabling you to get out of debt faster.

If you’re not sure what type of student loan you have or the pros and cons of consolidation, contact your loan servicer. Even if your student loans are with private lenders or schools, they may offer relief if you request it.

9. Having Paycheck Protection Program (PPP) loans forgiven

The PPP is part of the CARES Act, and it supports small businesses, organizations, and solopreneurs facing economic hardship created by the pandemic. The program began providing relief in early April 2020, and the application window ended in early August 2020.

Participating PPP lenders coordinated with the Small Business Administration (SBA) to offer loans to businesses in operation by February 15, 2020, with fewer than 500 employees. Loan amounts could be up to 2.5 times the average monthly payroll up to $10 million; however, annual salaries were capped at $100,000.

For a solopreneur, the maximum PPP loan was $20,833 if your 2019 net profit was at least $100,000. The calculation is: $100,000 / 12 months x 2.5 = $20,833.

When you spend at least 60% on payroll and 40% on rent, mortgage interest, and utilities, you can have those amounts forgiven from repayment. Payroll includes payments to yourself, but you can’t cover benefit costs, such as retirement contributions, or payments to independent contractors.

In other words, a solopreneur could have received a PPP loan for up to $20,833, paid the entire amount to themselves, and not repaid it by having the load forgiven. Using a PPP loan for qualifying expenses turns it into a grant.

The best part about PPP loan forgiveness is that it won’t qualify as federal taxable income. Some states that charge income tax have indicated that they won’t tax forgiven amounts.

However, if you have employees, the PPP forgiveness calculations and requirements are more complex. For example, you must maintain reasonable salaries and wages. If you decrease them by more than 25% for any employee (including yourself) who made less than $100,000 in 2019, your forgiveness amount will be reduced. 

PPP loan forgiveness also depends on keeping any full-time employees on your payroll. But if you had employees who left your company voluntarily, requested a cut in hours, or got fired for cause during the pandemic, your loan forgiveness amount won’t be reduced for those situations.

The best part about PPP loan forgiveness is that it won’t qualify as federal taxable income. Some states that charge income tax have indicated that they won’t tax forgiven amounts.

However, not all states have issued their rules on taxing PPP forgiveness. So be sure to get guidance if you live in a state with income tax.

You must complete a PPP Loan Forgiveness Application and get approved by your lender to qualify for forgiveness. The paperwork should come from your lender, or you can download it from the SBA website at SBA.gov. Most PPP borrowers have from six months after loan disbursement or until the end of 2020 to spend the funds. 

The forgiveness application explains what documents you must include, and they vary depending on whether you have employees. Once you submit your paperwork, your lender has 60 days to decide how much of your PPP loan can be forgiven.

If some or all of a PPP loan isn't forgiven, you typically must repay it within five years at a 1 percent fixed interest rate. You don't have to start making payments for ten months after loan disbursement, but interest will accrue during a deferral period.

10. Getting SBA loans

In addition to PPP loans, the Small Business Administration (SBA) offers several loans for businesses and solopreneurs facing economic hardship caused by a disaster, including the COVID-19 pandemic.

  • Economic Injury Disaster Loan (EIDL) can be up to $2 million and repaid over 30 years at an interest rate of 3.75 percent. You can use these funds for payroll and other operating expenses.
  • SBA Express Bridge Loans gives borrowers up to $25,000 for help overcoming a temporary loss of revenue. However, you must have an existing relationship with an SBA Express lender. 
  • SBA Debt Relief is a program that helps you make payments on existing SBA loans for up to six months.

Depending on your state, you may qualify for unemployment assistance, which allows self-employed people, who typically are ineligible for unemployment benefits to get them for a period.

This isn’t a complete list of all the economic relief available for small businesses and solopreneurs. There are federal tax initiatives, funds from local and state governments, and help from private organizations that you may find by doing a search online.

How to manage money in uncertain times

When it comes to surviving uncertainty, such as how COVID-19 will affect the economy, those who have emergency savings will feel much less financial stress than those who don’t. That’s why it’s essential to maintain a cash reserve of at least three to six months’ worth of living expenses in an FDIC-insured bank savings account.

If you don’t need to dip into your emergency fund, continue shoring it up when possible. If you don’t have a cash reserve, accumulate savings by cutting non-essential expenses, and even temporarily pausing contributions to retirement accounts. That’s a better option than succumbing to panic and tapping your retirement funds early.

If you don’t need to dip into your emergency fund, continue shoring it up when possible.

If you find yourself in a cash crunch, contact your creditors before dipping into any retirement accounts you have. Many lenders will be willing to work with you to suspend payments or modify existing loan terms temporarily.

RELATED: How to Reduce Money Anxiety—Compassionate Advice from a Finance Pro

My new book, Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers, covers many strategies to earn more, manage variable income, and create an automatic money system so you can strengthen your financial future. It’s a great resource if you’re thinking about earning side income or have already started a business.

Many economic factors that affect your personal and business finances aren’t under your control. Instead of worrying, look around, and figure out how you can create more income or cut unnecessary expenses. Working on tasks that you can control gives you more clarity and helps manage stress in uncertain times.

Source: quickanddirtytips.com

ByCurtis Watts

FIRE: How to Find Your Aha Moments and the Key to Achieving FIRE

Although enduring the pandemic has been stressful to say the least, I have learned a multitude of lessons I’ll never forget. One of the biggest is that, like it or not, I’m not cut out to homeschool four kids while trying to work at home. Most of all, though, the pandemic has reinforced my feeling of gratitude for the life I live — and the life my family lives.

For example, when schools began shutting down and the whole country went into lockdown, neither my wife, Mandy, or I had to miss work or struggle to find childcare. When I work on my blog, my podcast, and other ventures in my home office, my wife already stays home with the kids and has done so for several years. 

And when the economy stalled and the stock market dropped like a rock, we never had to wonder how we’d pay our bills or what the future might hold. After all, we have a fully stocked emergency fund, and have plenty of passive income streams that aren’t tied to an employer or the stock market on any given day.

The bottom line: The pandemic has reminded me all I have to be grateful for, including the peace of mind that comes with financial independence.

Teaching My Kids About Financial Independence

Anyway, part of me has always worried that my kids wouldn’t get to learn the same financial lessons I did — at least, not in the same way. Because of the situation we’re in, my kids have never really lived in a modest home, and they have never had to go without. They have never been in a situation where we are trying to stretch the groceries for another week until payday, and in fact, the pandemic has made us rely a lot more on takeout and food delivery than we normally do.

Regardless, I recently took some time on one of our homeschool days to map out what it takes to run and pay for a household for my kids. 

Writing It All Out

On a giant whiteboard in my office, I created a list of most of our household bills — our mortgage payment, transportation expenses, phones, gas, insurance, utilities, and all of the taxes we pay. In another column, I wrote out a rough example of the amount of income it would actually take to cover those bills. 

From there, I talked with the kids about our household wants, or stuff they prefer to have. My kids went ahead and added shoes to the list, an Xbox and some dolls. 

At one point, the kids started asking questions about where the money for our bills actually comes from. I explained that, while I continue working on my podcast and blog and other business ventures, the majority of our income is mostly passive — as in, I am not actually working for it and I am no longer getting paid by an employer.

And in that moment, I began explaining to them my thoughts on financial independence — what it means to me, and how we actually got to that point. 

While my kids were sick of dad teaching and barely listening by then, they did have some thoughts on financial independence. I explained to them that, if they could save a ton of their income in their early working years, they could invest in passive income streams they could rely on for decades after that. 

We also talked about how secure it can feel to have enough money stashed away to get by, and to not have to rely on the whims of an employer or a J-O-B to stay alive. 

How I Realized We Were Financially Independent

All of this got me thinking about when I knew we were financially independent, and the “aha moments” I had along the way. After all, our journey to financial security didn’t happen overnight, even though sometimes it does feel that way.

But before I share how I knew we didn’t need to worry about money, I want to explain what I think financial freedom really is, based on a note I wrote on my whiteboard for our kids. 

What Financial Independence Is (and What It Isn’t)

For me, financial independence is not about making the most money you absolutely can, and it’s not about how much is in your bank account, the car you drive, or the size of your home. 

Instead, financial independence is about choice. 

Based on the way I interpret the FIRE movement, financial independence is about being able to choose where you work and what you work on, having the ability to spend your free time how you want, and living life on your own terms. It’s about not having to go to a job you hate, and to still have the money you need to pay bills and live comfortably, regardless.

Further, financial independence means being able to have the freedom of choice without any worry, without any stress, and without any anxiety — at least when it comes to paying bills.  

My Aha Moments

So, what are the “aha moments” that helped me realize we had been blessed with all we need — that we are financially independent?

In reality, it has been a lot of small things over the last decade or so — things like being able to rent two hotel rooms or a large Airbnb each time we travel, and not having to worry whether we can afford it. After all, I have four kids, and my wife and I don’t want to sleep in a hotel room stuffed six-people deep. 

Another big moment we had was the first time my wife and I maxed out our old Roth IRA accounts while also fully funding our 401(k)s, which happened early in our marriage. 

Then there was the year we started building our first “dream house,” which we lived in before the one we live in now. Our “starter home” was around 1,900 square feet and we lived there for quite a while. But we started building our 5,000 square foot dream house right before the birth of our second son — we even put in a pool shortly after that. 

This was when we were in our early 30’s, and building at that time just seemed like a dream come true. We even started building our new home before we sold our old one, which was only possible because we had our financial ducks in a row.

Other key “aha” moments along our journey to financial independence included:

  • The many times I turned down lucrative job offers and opportunities so I could continue pursuing my own dreams
  • When I realized I could take two weeks off to drive my family to the Grand Canyon in an RV — and I did it!
  • When I’ve made more money in a month than my parents used to earn in a whole year (since my parents topped out at around $40,000 to $50,000 per year during their working years)
  • Realizing I had the cash savings to purchase my childhood dream car (a yellow Lamborghini!), if I really wanted to
  • The time I sold a minority stake in one of my businesses and was handed the largest check I have ever received to date
  • The first time I paid $400 for a pair of Jordan shoes with no regrets or stress, which actually happened just a few years ago!

Funny enough, I sent my wife Mandy a text, for research purposes, asking when she first felt financially independent. Her answer was totally different than mine. 

Mandy says that she felt like she no longer needed to worry about money when we reached one year of expenses in our emergency savings account.

I have to agree with her, because that milestone did give me a lot of peace of mind. After all, having 12 months of expenses in an emergency fund means a lot could go wrong with our finances and we would still have the time and space to figure it all out.

3 Key FIRE Principles and How You Know You’re On Track

If you’re pursuing financial independence but progress feels slow, know that your path to financial freedom will have a lot of bumps along the way. If you’re like me, you might also find that you’re inching toward financial freedom in spurts, and that it doesn’t all hit you at once. 

The key for those seeking FIRE is being on the lookout for those “aha moments” that tell you you’re on the right path. No matter what anyone says, you won’t become financially independent overnight. Instead, you’ll probably hit several different stages over the months and years it takes to get there.

Not only that, but you should strive to adopt the right mindset for FIRE. For the most part, this means being willing to think differently about how the world works and how it should work, and being open to going your own way.

What are the key principles of FIRE — or the key mindset changes that can get you there? Based on my personal experience, here’s what I think they are.

Key Principle #1: Gratitude for What You Have

In my opinion, being grateful for what you have (and what God has provided) is one of the most important steps anyone can take. Even if things aren’t really going your way, and if life seems bleak and miserable at times, there is always something we can be grateful for. 

With that said, I recommend being grateful and hungry — as in, don’t be so grateful that you become complacent and stop pushing for more in your life. 

Continue to entertain the idea that there is always something else you can learn, more experiences you can have, and more wisdom to obtain by trying new things. And if you try something and fail, look for the lessons you can find in that failure and be grateful you had the chance to learn them. 

Key Principle #2: Flexing Your Bold Intentions

Another key principle of achieving financial independence is being willing to share your goals with the world — loudly and without hesitation.

In your own life, you might’ve noticed that people who are pursuing FIRE can’t stop talking about it. This is because FIRE enthusiasts usually have one important thing in common: they’re brave enough to put their bold intentions on display no matter what anyone thinks.

Let’s say you have the bold intention of achieving financial independence and retiring at 35. Why not take that goal and post it to your Facebook page? Start sharing it with your family, and don’t forget to tell your friends. 

Chances are good that you’re probably going to get a lot more criticism than support from your peers, but who really cares? 

Most people who pursue FIRE actually don’t care at all what other people think. That’s part of the reason they’re able to live differently, save a large percentage of their income, and stop trying to keep up with the Joneses in the first place.

Key Principle #3: Full Release of the Past

Finally, you have to make sure your future is bigger than your past — as in, don’t let your past mistakes define who you are today and who you can become.

I know from experience that it’s far too easy to focus on all of the mistakes you’ve made and opportunities you’ve missed out on. Trust me, I’ve made more than my share of bone-headed mistakes that could’ve easily derailed me, yet here I am. 

The key for anyone pursuing FIRE is having some humility for the situation while never letting your past mistakes hold you back. You have to be willing to put yourself out there again and again, knowing you might fail. The thing is, every failure has a lesson, and sometimes those lessons lead you to something great right around the corner. 

Maybe you skipped saving for retirement early in your career, and you feel behind from where you should be. Although you definitely missed out by not getting started early, you can only control the steps you take to reach your goal right now.

Perhaps you made a poor investment and lost money at one point, which is something most investors have done at least a few times. Instead of dwelling on that mistake, you have to learn to cut your losses, find the lesson in the mess, and move on. 

Why? Because the alternative isn’t moving forward, and that won’t get where you want to be.

The bottom line: Let go of the past and take stock of where you’re at now. From there, figure out a plan to reach your goals, and don’t stop until you get there.

The post FIRE: How to Find Your Aha Moments and the Key to Achieving FIRE appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

ByCurtis Watts

401k Early Withdrawal: What to Know Before You Cash Out

When it comes to making a 401k early withdrawal, there are a number of reasons why it might be tempting. With millions still unemployed due to the pandemic, unexpected expenses are taking a particularly hard toll. One reason why early withdrawal isn’t uncommon in the U.S. might be because it’s easy to assume you’ll have time to rebuild your 401k nest egg.

However, is the benefit of withdrawing your retirement savings early truly worth the cost? For many people, their 401k is their primary method of investing in their financial future. Before making a decision about early withdrawal, it’s important to consider the penalties and fees that could impact you. Read on to learn exactly what happens when you decide to dip into your 401k so you won’t be surprised by the repercussions.

How Much Are You Penalized for a 401k Early Withdrawal?

On the surface, withdrawing funds from your 401k might not seem like a bad option under extenuating circumstances, but you could face penalties. Young adults are especially prone to early withdrawals because they figure they have plenty of time to replace lost funds.

 

401k early withdrawal penalties

 

If you’re not experiencing a significant hardship, 401k early withdrawal probably isn’t the right choice for you. Ultimately, you could lose a substantial portion of your retirement savings if you choose to withdraw your 401k early to use the money to make other risky financial moves. Below, let’s delve further into the penalties that usually apply when you withdraw early.

1) Your Taxes Are Withheld

When you prematurely withdraw from your retirement account, your first consideration should be that you’ll have to pay normal income taxes on that money first. This means you’re losing at least roughly 30 percent of your savings to federal and state taxes before additional penalties.

Even if you only have $10,000 you want to withdraw, consider that you’re automatically giving $3,000 of your cash to the government. In the best case scenario, you might receive some money back in the form of a tax refund if your withholding exceeds your actual tax liability.

2) You Are Penalized by the IRS

If you withdraw money from your 401k before you’re 59 ½ , the IRS penalizes you with an extra 10 percent on those funds when you file your tax return. If we use the example above, an additional $1,000 would be taken by the government from your $10,000 — leaving you with just $6,000. If you’re 55 or older, you could try to get this penalty lifted by the IRS through the Rule of 55, which is designed for people retiring early.

Also, there are exceptions under the CARES Act, which is designed to help people affected by the pandemic. There are provisions under the act that state individuals under the age of 59 ½ can take up to $100,000 in Coronavirus-related early distributions from their retirement plans without facing the 10 percent early withdrawal penalty under certain conditions.

3) You Lose Thousands in Potential Growth

Even if you’re not deterred by tax penalties, think twice before you sabotage your long-term retirement savings goals. When you withdraw money early, you’ll miss out on potential future savings growth because you won’t gain the perks of compound interest. Compounding is the snowball effect resulting from your savings generating more earnings — not only on your principal investment but also on your accrued interest.

Also, if you make a 401k early withdrawal while the market is down, you’re doing yourself a disservice because you’ll be leaving thousands on the table. It’s unlikely you’ll fully recover the lost years of compound interest you would have benefited from. You might need to get creative with a passive income stream to help support you later in life.

 

tips to minimize 401k withdrawal penalties

 

When Does a 401k Early Withdrawal Make Sense?

In certain cases, it actually might be strategic to move forward with 401k early withdrawal. For example, it could be smart to cash out some of your 401k to pay off a loan with a high-interest rate, like 18–20 percent. You might be better off using alternative methods to pay off debt such as acquiring a 401k loan rather than actually withdrawing the money.

Always weigh the cost of interest against tax penalties before making your decision. Some 401k plans do allow for penalty-free early withdrawals due to a layoff, major medical expenses, home-related costs, college tuition, and more. Regardless of your strategy to withdraw with the least penalties, your retirement savings are still taking a significant hit.

401k Early Withdrawal, Hardship, or Loan: What’s the Difference?

Knowing the differences between a 401k early withdrawal, a hardship withdrawal, and a 401k loan is crucial. Due to the many obstacles to make a 401k early withdrawal, you may find you want to keep it untouched. If you’re convinced you still need to use your 401k for financial assistance, consult with a trusted financial advisor to figure out the best option.

When Does This Apply?

Taxes and
Penalties

Early Withdrawal

Your funds are withdrawn to pay off large debts or finance large projects. Your 401k fund is typically subject to taxes and penalties.

Hardship Withdrawal

You’re only eligible for this type of withdrawal under circumstances such as a pandemic or natural disasters. Withdrawals can’t exceed the amount of the need and the funds are still subject to taxes and penalties.

401k Loan

The loan must be paid back to the borrower’s retirement account under the plan. The money isn’t taxed if the loan meets the rules and the repayment schedule is followed.

Additional Considerations

If you’ve left a job and don’t know what to do with your Roth IRA, a 401k transfer is a good option. Most likely, you will save money and have a wider range of investment options when you transfer your funds. 401k fees can be high, and rolling over your funds to a Roth IRA account could be wise in the long run. Also, be aware that the process is more complicated for indirect rollovers. 

In Summary:

  • If you’re one of the millions of Americans who rely on workplace retirement savings, early 401k withdrawal may jeopardize your future financial stability.
  • There are very few instances when cashing out a portion of your 401k is a smart move.
  • In most cases, any kind of early 401k withdrawal is detrimental to your retirement plans.
  • Stick to your budget and bulk up your emergency fund to stay one step ahead.

In short, 401k early withdrawals are usually counterproductive. Prevent compromising your hard-earned savings by using a free budgeting tool that will set you up for success. After all, being prepared and informed are two of the most important parts of maintaining financial health.

Source: SEC

The post 401k Early Withdrawal: What to Know Before You Cash Out appeared first on MintLife Blog.

Source: mint.intuit.com

ByCurtis Watts

Skipping Renters Insurance? Why That’s a Bigger Risk Than You’d Think

As a finance writer, I am surrounded by people who know a lot about managing money. But even those with the most money know-how can still miss financial must-haves.

For instance, in a recent conversation, a few of my coworkers stated they didn’t have renters insurance. This puts them among the 59% of renters who don’t have renters insurance, according to a poll from the Insurance Information Institute. On the other hand, 95% of homeowners carry homeowners insurance.

Granted, renting comes with fewer property responsibilities than owning. But don’t assume you can skip insurance for your home simply because you’re leasing it. Go without it and you’ll expose yourself to some major risks.

See why opting for a policy is protection you can’t live without, and learn how renters insurance can help smooth over the following five major renting crises.

1. Damaged Belongings

If you’re asking yourself whether you need insurance as a renter, a better question might be, Can you afford not to have it?

If the relatively small cost of a renters insurance premium—typically between $15 and $25 per month—seems too expensive, consider the alternative, suggests John Espenschied, agency principal of Insurance Brokers Group.

“Imagine replacing all your clothes, furniture, electronics, food, personal items, and priceless personal memorabilia,” he says. With renters insurance, the insurer will cover most or part of the value of damaged items. Without this coverage, you’re completely on the hook for all those costs.

Espenschied tells a story of one of his clients, a young woman to whom he recommended rental insurance multiple times. She declined the coverage.

Months later, there was an electrical surge in the building. “It took out everything she owned that was plugged in, including the TV, computer, and several other items,” Espenschied explains. These items were permanently damaged and unusable.

Had she opted for renters insurance, Espenschied could have helped her submit a claim and get the money to replace those belongings. Unfortunately, without the policy there was nothing he could do.

Don’t put yourself in the same position—get a renters insurance policy. On top of that, take steps to document all belongings and valuables so you can prove ownership in a renters insurance claim.

2. The Temporary Loss of a Habitable Home

Some disasters—such as fires, flooding, and electrical issues—can require extensive repairs and render your rental uninhabitable. Your landlord will usually handle these repairs, but if you lose the use of your home, your landlord might only be required to refund a prorated rent for the days you can’t live in your rental.

But if you’re out of a place to live, your daily rent rate might not cover any decent hotels or other temporary housing options.

But there’s good news: “Most renters insurance policies can help you in the event something happens to your apartment or house and you have to live elsewhere while it’s repaired,” says Jennifer Fitzgerald, CEO and cofounder of insurance comparison site PolicyGenius.

Typically, you can find a hotel nearby and your renters insurance will cover the costs of your stay until you can resume habitation of your home.

3. Stolen Belongings

Renters insurance typically includes coverage for theft and burglary too. If your home is broken into or burglarized, you can file a claim with your renters insurance provider to replace any stolen or damaged items.

“It even covers your belongings when they’re not physically in your home,” Fitzgerald says. “So if you take your laptop with you to the local coffee shop or on vacation and it’s stolen, your policy could help cover the costs of getting it repaired or replaced.” Renters insurance will usually be the policy that covers theft of personal items from your car too.

If your home is broken into or your purse is stolen from your car, promptly notifying authorities is an important step—filing a renters insurance loss claim will usually require a police report of the theft.

4. Personal Liability for Legal Damages

The most important protection your renters insurance provides, however, might be personal liability protection.

“If your dog bites someone or a food delivery person slips and falls, you’re covered,” says Stacey A. Giulianti, chief legal officer for Florida Peninsula Insurance. Instead of being held personally responsible for those damages, your insurer will step in and help. “The carrier will even hire and pay for an attorney to defend any resulting lawsuit.”

This can be especially important if you are found responsible for damage to adjacent properties as well, Espenschied says. For example, renters insurance will cover you if your toilet or tub “overflows and leaks into the neighbor’s unit below, causing damage to their personal property and cost to repair the building.” You may also be covered if a kitchen fire in your apartment causes damage to the unit above you.

The damage and loss can easily add up to tens of thousands of dollars. In cases like these, renters insurance can be the difference between smooth recovery and huge financial loss or even bankruptcy.

Make sure you understand your coverage. “Every policy is different, so talk to an agent and read your policy terms,” Giulianti warns.

5. An Eviction for Violating Your Lease Agreement

Many lease agreements include a clause in which the tenant agrees to purchase a renters insurance policy. These common clauses usually clarify that the landlord’s property insurance coverage does not extend to your personal belongings.

If you sign a lease with such a clause, you are agreeing to maintain this insurance coverage throughout your residency there. If you fail to get a policy or allow it to lapse, your landlord is within their rights to serve you with a “comply or quit” notice and possibly begin eviction proceedings.

If you don’t currently have a policy, reconsider getting renters insurance. Alongside a healthy emergency fund, having the right insurance can bring vital financial security to your life. For the cost, renters insurance provides protection and peace of mind.

“Most renters can get a policy for around $20 per month,” Fitzgerald says. “That’s a small price to pay when you think about the fact that if you don’t have renters insurance, you’ll be forced to cover the cost of replacing any and all items damaged.”

Procuring a renters insurance policy is a smart step toward financial security. With the right policy, you can avoid debt in an emergency and protect your possessions and your home. If you’re ready to buy a home, learn more about the ins and outs of home mortgages in Credit.com’s Mortgage Loan Learning Center. And to be financially prepared for anything, it’s also a good idea to build your credit score so you can qualify for loans and other credit when necessary. See where you stand with a free credit score from Credit.com.

Image: istock 

The post Skipping Renters Insurance? Why That’s a Bigger Risk Than You’d Think appeared first on Credit.com.

Source: credit.com

ByCurtis Watts

What Is an Insurance Deductible?

You have to hit your insurance deductible before your insurance will start contributing.

When you have an insurance policy, you may have to foot the bill for some of your medical expenses before your insurance company starts chipping in. This initial amount is your insurance deductible. The size of deductibles can vary depending on the specifics of your plan, and you’ll want to consider the deductible as one of many factors when you’re choosing your health insurance.

The Basics of Insurance Deductibles

Your insurance deductible is the amount of money that you’ll have to pay before the insurance company will provide any assistance. So, if you have a $600 deductible for your health insurance, that means you’ll need to pay $600 out of your own pocket for any doctor’s visits, prescriptions, tests or any other medical services before insurance contributions will commence.

Deductibles apply for many different types of insurance, the most notable being health insurance, car insurance and homeowners insurance. We’ll go through details specific to each type in turn.

Health Insurance Deductibles

Health insurance deductibles will vary in amount depending on the type of insurance plan you have. Typically, plans with a high deductible have lower monthly premiums, while plans with lower deductibles will tend to have higher premiums. In other words, if you have to spend a lot to reach your deductible, the tradeoff is you pay less in premiums every month. The extreme version of this is the high-deductible health plan (HDHP), which has a deductible of at least $1,350 for an individual and $2,700 for a family. HDHPs also come with access to a health savings account (HSA), which allows you to save up for medical expenses with pre-tax money.

Once you reach your deductible, that’s when cost-sharing measures like copays and coinsurance come into play. Some plans will have copays for certain services that apply before you hit your deductible, but not all.

Homeowners and Car Insurance Deductibles

car insurance policies also come with deductibles

With a car insurance deductible, your insurance company will typically pay for any repairs necessary after you hit your deductible, provided you have a plan that covers the costs of repairs. The same is true with homeowners insurance. This differs from a health insurance deductible, where you will almost surely have to keep paying at least part of the bill after you hit it.

The calculus for choosing your deductible is slightly different with these two insurance types than with health insurance. With the latter, it’s highly unlikely that you won’t have any medical expenses during the course of the year. Most people that have health insurance are going to use it. With homeowners and car insurance though, that’s not the case. It’s very possible that you go a year without getting in a car accident or your house burning down or getting burglarized.

Choosing Your Deductible

Odds are you’ll have options to choose from when selecting your health insurance plan. Those options will likely have varying deductibles. When making the choice between these options, consider the state of your health.

Is there a good chance you’ll have an annual check-up but not much else? If that’s the case, you may be suited for a plan with a higher deductible and lower premiums. If instead you expect to have one or more procedures during the year or you require expensive medication, you may be better off accepting the higher premiums in exchange for a lower deductible.

Of course, many of your medical expenses will be impossible to predict beforehand. Therefore, you’ll also want to consider how risky you want to be with your deductible. If you have plenty of savings and could handle a few hefty medical bills, you may be more inclined to take the gamble on a high deductible. If you’re stretched thinner, this may not be the case. You may not want to risk opting for the high deductible and then getting hit with a huge bill that’s all your responsibility.

The Takeaway

Medical bills

Because of deductibles, you’ll still have pay a portion of your medical expenses before you can rely on your insurance company. When you’re considering which insurance plan is right for you, make sure to factor the deductible into your decision. If you have plenty of savings and you’re fine with some risk, you may want to opt for a higher deductible and lower premiums. If you’re more risk averse, you may decide to accept the higher premiums in exchange for a lower deductible.

Tips for Protecting Against Risk

  • Having an emergency fund in place can help provide a cushion that allows you to choose a higher deductible. You can stash your emergency fund in either a CD ladder or a high-yield savings account.
  • If you’re not sure how an unexpected medical expense would fit into your finances, consider working with a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.

Photo credit:©iStock.com/sturti, ©iStock.com/sefa ozel, Â©iStock.com/asiseeit

The post What Is an Insurance Deductible? appeared first on SmartAsset Blog.

Source: smartasset.com

ByCurtis Watts

Budgeting Help

Free!

How Mint offers budgeting help

Ready to start budgeting and tracking your money? See our article Budgeting Tips from Mint — and subscribe to our blog for more budgeting help.

Budgeting Calculators

We’ve also got some calculators that can help you figure out exact dollar amounts for your budget:

How Much do I Need for Emergencies? Saving enough money for emergencies is the first step in setting a budget. Don’t be caught by surprise. How much do you need in your emergency fund?

How Much Should I Save to Reach my Goal? Are you budgeting for a house, vacation or retirement? Quickly find out if you’re saving enough to reach your goals on schedule.

Value of Reducing or Foregoing Expenses. Small changes in your daily routine can add up to big budget savings. Find out how much.

How Much Does Inflation Impact my Standard of Living? How much will you need in 5, 10 or 30 years to maintain your standard of living?

Sign up for Mint

Budgeting help is only a few seconds away. Just create a budget with Mint. Sign up now

The post Budgeting Help appeared first on MintLife Blog.

Source: mint.intuit.com