Borrowing From A 401(K) Plan Costs In The Long Run
As employees with 401(k) plans see their retirement assets grow, especially if the money has been invested successfully in the current bull market in stocks, the desire to tap the 401(k) account before retirement could become quite strong. But the best advice is: don’t.
Under strict limits, some employers - but by no means all - permit employees to borrow from 401(k) plans without any tax penalty. In certain circumstances, such borrowing may seem more favorable than other forms of borrowing, in part because you repay the loan plus interest to yourself. Generally, the interest you pay is not tax-deductible. Check with your employer to learn if you can borrow from your 401(k) account and what the rules are.
Having said that, it’s hard to imagine how you could structure a 401(k) loan that would not leave you worse off from an investment standpoint than your co-worker who left his or her account alone.
Steven Weinstein, a partner and national director of personal financial planning at Arthur Andersen in Chicago, said the issue boils down to opportunity cost. Every dollar that you borrow from your 401(k) account is a dollar absent from the account that is not compounding at the long-term rate of return you’ve achieved in structuring your plan.
“The rate of interest you pay on the loan doesn’t compensate you for the loss of investment return,” Weinstein said.
Having your cake and eating it, too, is not recommended in saving for retirement.
Farmer, rancher tax bulletin
The Washington State University Cooperative Extension Service is selling a new bulletin with tax-cutting tips for farmers and ranchers.
Economist Gayle Willet said the brochure explains how to defer income, control cash flow between tax years and entities, buying and selling farms, and other agriculture-related issues.
The bulletin is available by writing: The Bulletins Office; Cooper Publications Building; Washington State University; Pullman, WA.; 99164-5912. Request WREP 0148. “Federal Income Tax Management for Farmers and Ranchers.” Cost: $1.50. Checks should be made payable to Cooperative Extension Publications.
Telephone orders in minimum amounts of $5 are possible by calling 1-509-335-2857 and using VISA or MasterCard.
Closed-end funds explained
What’s a closed-end mutual fund and how does it differ from open-end funds?
A closed-end fund issues a set number of shares and then closes, meaning it does not accept any more money from investors. The typical open-end fund continues to accept more investor money and increases the number of shares as the fund grows.
Shares in closed-end funds are traded on the stock market just like shares of ordinary stocks. Share prices are influenced by the changing prices of the securities owned by the fund and by investors’ expectations. This allows a closed-end fund to trade at a “premium” or a price higher than the total value of the securities it owns, if investors expect its holdings to rise in value. Or it can trade at a “discount” or less than the total value of securities it owns, if investors expect prices of its holdings to fall.
Open-end fund shares are not traded on the stock market and, thus, do not trade at premiums or discounts. Their prices are determined only by the value of the securities they own.
Watchdog monitors banks
A lot of outfits publish safety ratings on banks, thrifts and credit unions nationwide.
MoneyLine uses Veribanc, of Wakefield, Mass., because it’s got a good track record: In effect, Veribanc has picked the failures before they failed.
To reach Veribanc, call 1-800-837-4226 from 8:30 a.m. to 7 p.m. Eastern time Mondays through Thursdays, or 8:30 a.m. to 5:30 p.m. Eastern time on Fridays.
You’ll be charged $10 for the first rating, and $5 for each additional rating ordered at the same time. You’ll get a printed confirmation by mail.
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