Homebuyers with bad lenders just got a break. Congress has passed an extension provision to the popular homebuyer credit. Now homebuyers who qualify under the other rules (including going into contract by April 20, 2010) have until the end of September to close.
Category: Personal Finance
Planning on becomming a centurion? better save…
Marketplace money had a good story over the weekend about the financial impacts of living to be 100. You can read/ listen to it HERE. The story profiled Horte Guttman who is now 102 years old. Unfortunately she ran out of money at age 98 despite good financial planning. According to the story a new study indicates that most babies born after 2000 in developed nations will live to be 100. As our life expectancy lengthens it becomes increasingly important for financial planners to account for that in calculating retirement needs. The bottom line is we’ll all have to save more and possibly work longer than we previously thought.
Last Thursday’s plunge
I mentioned last week that I was going to take some time over the weekend to read about last Thursday’s temporary 1,000 point plunge in the Dow Jones Industrial Average. I thought NPR’s Planet Money did the best job of explaining it in layman’s terms. Here is a link to the podcast. The explanation starts at 1:40.
They mention in the podcast that consulting firm Accenture (ACN) briefly traded at $.01. That would have been quite a buy considering it is trading at $41.00 currently. If you were a lucky Joe who had an order in for 100 shares of ACN expecting to pay around $41.00 and then your confirmation comes back which shows you bought @ $.01 (or $1.00 total) you would have experienced a 1-day 4,000% return!
Money and Happiness
My wife emailed me David Brook’s column in the NY Times today. David writes about the relationship between money/ professional success and personal relationships through the lens of Sandra Bullock’s current situation. What’s interesting for me is that a couple weeks ago when teaching my personal finance class to high school seniors at Sunset High School I posed this same question to the students (see slide #10 at THIS LINK):
Can money buy happiness?
Conversely, does a lack of money breed unhappiness?
Working in groups the class came to a consensus that in general once a person has satisfied their basic needs (i.e. food, shelter, love, spiritual) more money will not substantially increase a person’s happiness. And in today’s NY Times David writes:
“…the relationship between happiness and income is complicated, and after a point, tenuous. It is true that poor nations become happier as they become middle-class nations. But once the basic necessities have been achieved, future income is lightly connected to well-being. Growing countries are slightly less happy than countries with slower growth rates, according to Carol Graham of the Brookings Institution and Eduardo Lora. The United States is much richer than it was 50 years ago, but this has produced no measurable increase in overall happiness. On the other hand, it has become a much more unequal country, but this inequality doesn’t seem to have reduced national happiness.“
Good work Mrs. Taylo’s class!
Slides from Session2- Sunset High School Financial Literacy
Slides from Session 1- Sunset High School Financial Literacy
Retirement Survey Shows Many Americans Don’t Know How Much it Will Take
Each year the Employee Benefit Research Institute conducts a survey about American’s financial preparation for retirement. The results from this years survey were just released and show a couple troubling trends. You can read the entire report summarizing the results HERE. But if you prefer the executive summary like me here are a few cliff notes:
*Only 16% of workers surveyed stated that they were very confident about having enough money for a comfortable retirement.
*Only 19% of retirees said they were very confident about having a financially secure retirement.
*More than half (54%) of workers surveyed reported that the total value of their household savings and investments was less than $25,000.
*Less than half (46%) of workers reported that they have tried to calculate how much money they would need to accumulate in order to insure a comfortable retirement.
If you are like a majority of workers and haven’t taken the time to calculate your capital accumulation needs then you can contact a financial planner (I’d be happy to help) or check out this blog post which has many retirement calculators.
When you start saving for retirement matters
I was studying for my upcoming CFP(R) exam last night and came across an interesting table that showed what percentage of a person’s gross income they’d need to save in order to create enough savings to provide enough income for their retirement years. Keep in mind that these are just general estimates and each individual should contact a financial planner to have them do the math for their specific situation.
If a retirement saver begins at age 25-35 and saves regularly until retirement they’d need to set aside 10-13% of their gross income.
If a person delays a regular retirement savings plan until they reach the ages of 35-45 they’d have to set aside 13-20% of their gross income.
If a person waits until they are 45-55 they must save 20-40% of their income AND may have to delay retirement until the age of 70.
Let compound interest do the work for you!
Bull and Bear tug-of-war
Readers of this blog are probably well aware of the fact that mortgage rates have basically remained in a tight sideways range since mid-January. Followers of the stock market know that the equity markets have effectively traded sideways over that time as well. The WSJ published this article today summarizing two opposing views of stocks from a couple heavyweights which seems to represent the polarizing opinions on Wall Street that keeps the m
arket from having a clear direction up or down. One of the viewpoints is from Robert Shiller who is a bear and argues that stocks are currently overvalued. The opposite view is from his close friend Jeremy Siegel who I got to see speak in Portland a few months ago. He argues that on a historical scale stocks look cheap right now. What I find interesting is that effectively each uses historical data dating back to the 19th century to support their views. In effect they are looking at the same data and drawing two completely different conclusions.
If you are a stock market fan then the article is worth a read.
Using retirement funds for down payment
For many people saving for a rainy day is hard enough as it is. Add on top of that all the other financial objectives a person is typically concerned with (i.e. retirement, college savings, paying down debt) saving for a down payment on a home can be difficult. Because of this I often have clients who are interested in accessing funds in their retirement accounts to come up with money for a down payment. In order to do this it’s important that homebuyers be educated on their options. Therefore, I have put together this post to summarize the important points of using 401K, IRA, and Roth IRA funds towards the purchase of a home.
One quick note that is generally applicable to all three sources. Typically funds derived from a retirement plan used towards the purchase of a home may only be used as a down payment and “usual or reasonable settlement costs” and may not be used to pay other debts in order to qualify for a new mortgage.
401K
Rules for each 401K plan are slightly different so homebuyers need to talk with their plan administrators to make sure they can use their 401K. Technically, a person cannot generally withdraw money from their 401K to use towards the purchase of a home. Instead most 401K plans will allow participants to borrow money from their 401K and pay it back with payroll deductions. For funds being used to purchase a home the repayment period can be longer than the normal required period of 5 years but check with the plan administrator to make sure the payments won’t be onerous .
The plan will usually assign an interest rate to the loan but because the participant is paying and receiving the interest the effective cost of borrowing is 0%. However, while the loan is outstanding keep in mind that it is not receiving investment returns so the true cost of tapping into a 401K is the “opportunity cost”. Homebuyers wishing to use their 401Ks should consider the impact this will have on their future ability to retire. Also, keep in mind that repayment of a 401K loan is made with after-tax dollars. Therefore, when that homeowner retires int he future they will effectively pay tax on the loan amount twice (once when they repaid the loan with after-tax dollars and again in retirement when they take a taxable distribution from the account).
Typically the maximum a person can borrow from their 401K is the lesser of $50,000 or 50% of their vested balance. If the vested balance is less than $20,000 then sometimes they can borrow up to the vested balance or $10,000 whichever is greater.
It’s important to note that a person does not have to be a first-time homebuyer to use 401K funds. It’s also important to note that because the homebuyer will pay back the 401K loan with payroll deductions then it is generally not possible to access funds in a 401K with a previous employer. The homebuyer must currently be working for the plan sponsor. This also creates a significant risk because if the employee is terminated during the repayment period on the loan and cannot pay back the remaining balance the amount will be treated as a non-qualified distribution and be subject to ordinary income tax plus a 10% penalty.
Please note that some 401K plans do allow “hardship” withdrawals for participants who qualify as a first-time homebuyer. However, these distributions are taxable so unless cash-flow is a major concern often times a loan will make more sense.
IRA
IRAs are different from 401Ks in that a person is able to take distributions instead of having to take out a loan. The question then becomes whether or not the distribution will be a deemed a “qualified” or “non-qualified” distribution. A “qualified” distribution IS NOT subject to a 10% penalty while a “non-qualified distribution” is subject to a 10% penalty.
In order for a distribution to be qualified the homebuyer must be a first-time homebuyer which the IRS defines as a person who has not owned real estate in the previous 24 months. The $10,000 cap is a lifetime limit so once a person has utilized the $10,000 they may not use it again.
So long as the contributions to the IRA were tax deductible for the homebuyer then the distribution will be taxed as ordinary income. If the distribution does not meet the criteria of being a “qualified” distribution then it will also be subject to a 10% penalty. Since the homebuyer will typically incur income tax liability for an IRA distribution it’s important they account for that when budgeting out their money from the time of distribution to the following April 15th when taxes are due.
Roth IRA
The rules for Roth IRA distributions used towards the purchase of a home are similar to the aforementioned traditional IRA guidelines in that it is only available for those who meet the IRS’s definition of a first-time homebuyer and is only available up to $10,000. However, there are a couple key differences.
One key difference is that for a distribution to be “qualified” it may not be made inside a 5-taxable-year period which begins January 1st of the taxable year for which the very first contribution was made to any Roth IRA the homebuyer owns. In other words, for a first-time homebuyer who wishes to take a “qualified” distribution from their Roth IRA account anytime in 2010 must have made their very first Roth IRA contribution (to any Roth account) no later than the 2005 tax year.
The other key difference is taxation. Because Roth IRA contributions are not tax deductible at the time of contribution “qualified” distributions are not treated as taxable income. However, if the distribution is not deemed to be “qualified” then it will be subject to a 10% penalty and depending on the contributions made and distribution taken may also have income tax implications.
I hope this summary enables homebuyers out there to make better decisions with their money. Please remember that I am not a tax professional and tax code is subject to change. It is best to discuss your options with a knowledgeable professional when you are close to make such a decision. It is also important to consider the impact that the decision will have on your ability meet your retirement accumulation goals.