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Paying Off Your Debts Using 401(k)

Aug 9th, 2010
by jreed.
2 comments

lets go by HeadOvMetal Note from Jim:  I’m on vacation this week, and in my absence I’ve had a few folks volunteer articles.  This is a guest post by Jack Reed. He offers advice on various debt related issues with special focus on bankruptcy.

Being in debt can be extremely stressful. Thousands of Americans are resorting to debt settlement services to reduce their debt burden. If you think that your debts are a major hindrance to securing financing for major purchases, then you might consider reducing your debt load by borrowing against your 401k. More and more people are looking at their 401k as an option to get out of debt. The best advantage that you get by doing this is that 401k loans are not normally reported to credit bureaus. Read on to know how you can go about it.

1) Approach your employer: First of all, you need to make sure whether you qualify for the loan. Read carefully the 401k plan description that you have with your employer. There are different types of plans; some allow you to take the loan while some will require you to pay a certain amount. Go through these plans to check your possibility of getting a loan against the money in your 401k.

2) Borrow only as much as you need: Withdraw just as much as you need to pay off your debt. Some plans might restrict you to take out just one loan at a time and you will not be allowed to use your 401k fund until you clear your first loan completely. If you are under 59½ years of age, then withdrawing from your retirement savings plan will invite penalties. Though you can evade these penalties, you may be required to draw money in annual installments and that will not be beneficial if you intend to make monthly payments on your debts.

3) Do the necessary paperwork: Ask your employer to provide you with the required paperwork and fill it up. You also have an option of logging into your 401k account online. After your loan gets authorized, you should receive a check in your mail from your plan account as a confirmation. Now you can pay off your debts using this money.

4) Repay the loan: Make a determination to replenish your 401k account if you have taken money directly from the plan. If you have borrowed money from your employer, then he normally adjusts by deducting money from your salary accordingly. If you fail to replace what you took, you will owe income tax on the money borrowed plus incur a 10% penalty if you are not at least 59½ years old.

5) Hardship withdrawals: Some plans permit you to withdraw funds if you are under financial hardship. But remember, once you take the money out of your plan using a hardship withdrawal, you can’t put it back in and you lose the tax advantage on those funds forever.

Your decision to use 401k money to pay off your debts is completely a personal issue. There are mixed reactions to it. Some advise against it while others who have benefited from it will encourage you. Remember that the purpose of your 401k plan is to provide for you in your golden years and being careful with your decisions will ensure that you do not compromise with your post-retirement happiness.

Photo by HeadOvMetal

The Importance of a Fiduciary Standard of Care

Jun 2nd, 2010
by jblankenship.
4 comments

Steven YoungToday, my friend and colleague, Steven Young, CFP®, has graciously provided a guest post, giving us his thoughts on the fiduciary standard of care.  Steven operates his Fee-Only financial planning firm, Steven Young Financial Planning, out of Springfield, Missouri.

A fiduciary is required by law to act in his or her client’s best interest at all times.  What you may not know is that the vast majority of those who call themselves “financial advisors” or “financial planners” are not actually subject to a fiduciary obligation.

Under current rules, advisors who are compensated by commissions on the sale of financial products are subject to a lesser standard known as the “suitability rule.”  This regulatory hurdle requires only that the product sold be appropriate for the client (in other words, not too risky) at the time of sale.  In fact, these “advisors” can now sell you products that pay them bigger commissions, without advising you that there might be a far better (and cheaper) alternative for you – it just wouldn’t be as good for them. Moreover, this suitability obligation ends once the transaction is completed.

Registered Investment Advisors that have either registered with the SEC or the state in which they do business do have a legal fiduciary duty to their clients.

One of the most important questions you can ask of anyone offering you financial advice is, “Do you have a legal obligation to act in my best interests?”

It is the bright white line that separates those who sit on your side of the table and have a legal obligation to act in your best interests and those who sit on the other side of the table and have no such obligation.

Members of the Fee-Only Financial Advisory community firmly embrace our role as a fiduciary for you.  This is not just a regulatory requirement imposed by law; it is part of our culture. Operating as Fee-Only firms to fulfill this role eliminates the conflicts of interest that may arise when advice is delivered through commissioned product sales.

To help educate consumers about the importance of the fiduciary relationship between advisor and client, the National Association of Personal Financial Advisors (NAPFA) hosts a website which provides information about the need for a fiduciary standard in the financial services industry as well as a checklist consumers should use in evaluating their own advisor.

If your friends and family are not working with a fiduciary advisor, please share this information with them.

Photo courtesy of Steven Young, CFP®
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