Most people are familiar with IRA and 401K plans. Financial planners always advise their clients to contribute to these programs for retirement and many of us have used the tax deferred benefits to significantly reduce our income taxes each year. However, why don’t we hear more about 529 plans?
According to a recent article in the Journal of Financial Planning, American families are leaving an estimated $237 billion on the table by not investing their college savings in 529 plans under normal market conditions. The primary benefit for most families is not its tax advantages; it is the fact that it encourages investing instead of using a savings account.
The article continues that middle and upper-middle-class families stand to benefit the most from increased adoption of 529 plans. The average family saving for college would see a benefit of $4,044 per child.
West-Cal Reverse has a program called a Limited Equity Share System that allows home owning families to diversify investments by transferring from their residential real estate equity into a 529 plan and then invest for maximum effect. This can be a game-changer for college financing.
According to Douglas Solorzano, an advisor with DAS Wells Fargo Advisors in Century City, Los Angeles, CA, a well-managed stock portfolio has returned 9% per annum over the last 30 years. A $100,000 contribution, using a LESS program to create a lump sum, into a 529 portfolio when a child is born, could grow to nearly $500,000 by the time he or she is ready to go to college.
In these difficult times, we ask you to be safe, but to continue to have hope and plan for you and your family’s future. Learn more at www.less.reverseurthinking.com
One of the things staying home during war and pandemics gives you is a lot of time to address things that prior to the war or pandemic you said you didn’t have time to do. You get a thought and then you hear yourself say, Ill try to remember to do this later cause I don’t have time right now. Normally you would then be off to something more pressing. Now, however, a second voice enters after the first and says, You don’t have time because you have to do, or go or say…what? This brings you back to the moment and the task at hand.
I was struck by this last Sunday as I was trolling through my emails over my first cup of coffee. Like most people, I receive lots of spam, advertisements, newsletters and blogs that I signed up for that I never read. In addition, I am bombarded by other marketing emails that got my information from the ones I did sign up for. As I sat there that morning I realized I had no place to go that was more important than being right then and there.
So I applied what I knew about how to clean out a clothes closet. If you haven’t worn it in the last 24 months, get rid of it. If I hadn’t read or bought from or interacted substantially with a recurring email "vendor" in the last 12 months, unsubscribe. Some I unsubscribed to but I saved the link in case I wanted to see something there in the future, but most were just unsubscribed to. It took me an hour to go through them all. And I am sure I missed some this go round and will have to do it again a couple of times.
It was interesting how many had layers for me to swim through before they would accept my request to unsubscribe. Lots of opportunities to waver and feel a sense of loss, and many tried to make me feel guilty about doing it. But when I was done, I knew that I had taken back control over a substantial part of my time and life.
I would strongly recommend that you do the same. If this pandemic has taught us anything, it is that we need to get back in touch with our life and be present. If you are housebound, you need to allow time to sit still in silence and think about what you think about. Not just about what you do or how you feel. Because how you feel and what you do is caused by what you think. And if you don’t think about what you think about, you wont know that that is what is causing your emotions and your actions. GIGO: garbage in and garbage out. You are what you think about.
And that is one of the ways that we emotionally spend money we don’t have online and are broke at the end of the month. Be allowing ourselves to be bombarded on line at home.
And I for one don’t want to think about all of the things that recurring emails and marketing under the guise of free information want me to think about all the time. Unless of course I do decide that I want to think about them. In which case I want to sit still long enough to focus and read them and not just say I need to make time to do that one-day. Think about that.
Because of the Coronavirus, many people are facing financial challenges, especially paying their mortgage. If you’re unable to make your mortgage payments, you could lose your home to foreclosure. Federal lenders and some private lenders are offering borrowers temporary help, like stopping or delaying foreclosure or modifying the mortgage. But these measures don’t apply to everyone. If you need help, research the options available to you for getting through these tough times. These tips can help:
Learn about newly available relief for federally backed mortgages.
A new federal law, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, creates two protections for some borrowers. To be eligible, you must have a federally-backed mortgage and be experiencing financial hardship because of the Coronavirus.
First, figure out if your mortgage is federally backed. If you don’t know, you can call your mortgage servicer or follow the links below. You can get your servicer’s contact information from your billing statement.
More than half of U.S. mortgages are backed by Fannie Mae or Freddie Mac, and these mortgages count as federally backed.
Look up whether your mortgage is owned by Fannie Mae
Look up whether your mortgage is owned by Freddie Mac
If your loan is backed by the Department of Housing and Urban Development (FHA mortgages), Department of Agriculture (USDA mortgages), or Department of Veterans Affairs (VA mortgages), you also may be eligible for relief.
2. Contact your servicer no matter what type of mortgage you have.
Tell them your situation and ask what options are available to you. Even if your mortgage is not federally backed, you may still qualify for other help.
If you’re considering forbearance, keep in mind that it is not loan forgiveness, and ask your servicer what happens after the forbearance ends. Your servicer should be able to tell you if it will extend the loan term so you can make the missed payments later, if your monthly payments will go up to make up the difference, if you will owe the entire unpaid amount in a lump sum, and how forbearance could affect your credit.
3. Need advice? Contact an approved counselor.
Go to the Department of Housing and Urban Development’s (HUD) list of approved housing counseling agencies to find a counselor in your state who can explain your options. Consider contacting the Homeownership Preservation Foundation (HPF) at 888-995-HOPE. HPF is a nonprofit organization that partners with mortgage companies, local governments, and other organizations to help consumers get loan modifications and prevent foreclosures.
4. Check what help is available where you live.
Your state may offer additional support. Some states have frozen foreclosures. Find your state government’s website and look around for the latest updates on help for borrowers.
5. Scammers follow the headlines.
It’s tempting to hire a company that says they can get a change to your loan that will reduce your monthly mortgage payment or take other steps to save your home. Unfortunately, many companies use half-truths and even outright lies to sell their services or they make promises but don’t deliver. Learn more about avoiding mortgage relief scams.
6. Don’t pay up-front for help.
Federal law says that even if you hire someone to help you with your mortgage, you don't have to pay them until they deliver the results you want. It's illegal for a company to charge you a penny until you’ve accepted their written offer for a loan modification or other relief from your lender, and you’re free to reject an offer you don’t like. Even if you hire someone, you should always feel free to contact your mortgage servicer directly to see whether they can offer you additional options. Learn more about your rights when it comes to hiring a mortgage relief company.
Thanks to: Carol Kando-Pineda | Attorney, FTC Division of Consumer & Business Education
Accurate as of 4/14/2020
Dear Friends and my Community of Allies,
I have tried this week to create a comprehensive source for relevant information in these unprecedented times. This information is relevant to all of you nationally and some of it is specific to those of you who are Californians. Topics include federal updates, food, housing, financial considerations, government loan assistance programs, utilities and more.
Please feel free to forward this to anyone you feel will benefit from the information directly or indirectly. However, there is too much information for a newsletter so I have included a link to my bog where you may download an Excel spreadsheet. Please feel free to share the link as well.
My special thanks to my right hand Rhonda May for assisting in compiling this list.
Mat Sorensen | GUEST WRITER | CEO & Attorney at Directed IRA & Directed Trust Company
The coronavirus stimulus bill signed into law on March 27 creates new exceptions that allow 401(k) and IRA owners affected by the pandemic to tap into their retirement accounts early. The new law increases the dollar amount you can loan yourself from your own 401(k) from $50,000 to $100,000 and also creates a penalty-free early distribution rule whereby IRA or 401(k) account owners under age 59-and-a-half can take a penalty-free retirement account distribution of up to $100,000.
These new rules greatly increase access to retirement account funds, which have become one of the most reliable savings tools. At the end of 2019, Americans held more than $30 trillion dollars in retirement accounts, according to the Investment Company Institute. That’s right, trillions.
These new exceptions are among the many ways business owners, entrepreneurs and self-employed persons can provide short-term financial relief. Just this past week, I had two separate conversations with business owners who had requests on how they can take a loan from their 401(k) to cover payroll costs and their own personal expenses amid significant revenue shortfalls.
As the financial strength of Americans is being tested, many small-business owners and entrepreneurs are simply out of available cash and have limited lines of credit, but they may have a retirement savings account with funds that could help them survive. Tapping that resource could be the necessary short-term measure needed to bridge you or your business over until funding is secured from an SBA Disaster Assistance Loan, a home-equity line of credit or other long-term financing or equity investment.
Details of, and frequently asked questions about, the penalty-free, $100,000 early retirement distribution and increased 401(k) loan limit of $100,000 are more fully outlined below.
Penalty-Free Early Distributions Up to $100,000
Who Can Take the Penalty-Free Distribution?
The distribution rules are personal to the account owner and include anyone who has experienced “adverse financial consequences” from the pandemic. This is a broad definition and one that the account owner claims with their account administrator. Adverse financial consequences include being subject to a quarantine, being furloughed or laid off, having your business closed or hours reduced or being unable to work due to childcare changes and availability (closed schools, closed childcare facilities). The rule also includes anyone who has been diagnosed with COVID-19 or whose spouse or dependent is diagnosed with the virus.
What Accounts Qualify?
All retirement accounts fall under this rule. This includes IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, pension plans, 457 plans and 403(b) plans.
Am I Taxed on the Distribution?
The 10 percent early withdrawal penalty is waived, but you are taxed on traditional funds distributed. Congress did provide relief on the taxes on the distribution by allowing taxpayers to pay the tax owed on the distribution over three years. This is a significant benefit, as most retirement account distributions are subject to tax on the full amount in the tax year distributed. By paying over three years, you can spread the taxes due on the distribution over multiple tax years, which keeps you in a lower bracket and allows you to defer payment over time.
Can I Pay Back the Funds?
Yes. The special distribution provision allows you to pay back the retirement account over a three-year period. You can make multiple payments back to the account or one lump-sum payment to the account by the end of the three-year window. This is an excellent option, as it allows those who can get back on their feet financially to return the funds to their retirement account. And if you do, you’ll avoid any taxes on the distribution.
How Long Is This Penalty-Free Option Available?
The penalty-free distribution option is available on qualifying distributions made from January 1, 2020 to December 31, 2020.
401(k) Loans up to $100,000
Who Can Take the Loan?
Anyone who has a qualifying employer plan, such as a 401(k) or 403(b) plan, and has suffered “adverse financial consequences” from the pandemic. The qualification rule is identical to the penalty-free distribution rule and the account owner themselves claims whether they qualify with their account administrator. Adverse financial consequences include being subject to a quarantine (most states/cities now), being furloughed or laid off, having your business closed or hours reduced, or being unable to work due to childcare changes and availability (closed schools, childcare facilities). The rule also includes anyone who has been diagnosed with COVID-19 or whose spouse or dependent is diagnosed with the virus.
These loans are not available on IRA or SEP IRA accounts. Also, a 401(k) with a former employer is usually restricted from taking loans by that former employer. However, some individuals with IRAs, SEP IRAs or former employer plans who are self-employed may establish a solo 401(k) and then roll IRA or SEP IRA dollars over to the solo 401(k) to take a loan from the solo 401(k) account under these special coronavirus rules. There’s plenty of planning opportunities to those who need access to retirement account funds right now.
Are There Taxes Due on the Loaned Amount?
There are no taxes or penalties owned when you take the loan. And so long as you pay the loan back, it's a tax- and penalty-free opportunity to access your own retirement savings early.
How Much Can I Take?
Up to $100,000. The standard rule only allows individuals to take 50 percent of their vested 401(k) account balance (or other employer qualifying account), not to exceed $50,000. The special coronavirus rule not only increases the maximum loan amount from $50,000 to $100,000, but also removes the requirement that you can only loan yourself 50 percent of the account balance. These are two big improvements that will provide greater access to retirement account funds.
The differences are best understood by two examples. Under the standard rule, if you had a $200,000 401(k), you could take a loan of 50 percent of the account, not to exceed $50,000. This would allow you to take the limit of $50,000. Under the special coronavirus rule, with a $200,000 401(k), you could take the maximum of $100,000.
Let’s consider another example and assume you have a 401(k) with a $70,000 vested balance. Under the standard rule, you could take a loan of $35,000 because you can’t take more than 50 percent of the vested account balance. Under the special coronavirus rule, you can take 100 percent of the vested account balance and a loan of $70,000.
What Can I Use the Funds For?
By law, the loan can be used for anything you want. The funds can be used to cover personal financial expenses, business expenses like payroll or rent, new business startups, education expenses or any personal or business purpose you want.
How Long Do I Have to Pay It Back?
You’ve got five years to pay back the 401(k) loan, and it must be paid back in substantially level payments, at least quarterly, within five years. A lump-sum payment at the end of the loan is not acceptable.
What Is the Interest Rate?
The interest rate for 401(k) loans is currently 5.25 percent. By law, the interest rate to be charged is a “commercially reasonable” rate. This has been interpreted by the industry and the IRS/DOL to be prime plus 2 percent (prime is currently 3.25 percent). If the loan is for the purchase of a home for the account owner, then the rate is the federal home loan mortgage corporate rate for conventional fixed mortgages. Even though you are paying interest, you are paying that interest to your own 401(k), as opposed to paying a bank or credit card company. That’s a plus, as you’re repaying your 401(k) and getting the interest in the 401(k) too. Also, business owners who use a 401(k) loan to fund their business can expense the interest they are paying back to the 401(k). They can treat that interest expenses the same as interest they pay a bank on a business loan.
How Many Loans Can I Take?
By law, you can take as many loans as you want, provided that they do not collectively exceed the total loan amount. If you are taking a loan from a current company plan, some plans restrict you to one loan per 12-month period. There is also a fee under most plans for a loan ranging from $50 to $350, so make sure you check your 401(k) plan's loan rules and fees.
What Happens If I Don’t Pay the Loan Back?
Any amount not repaid under the loan will be considered a distribution, and any applicable taxes and penalties will be due by the account owner. Most plans give you a grace period of one missed payment, but after that, the total amount owed under the plan is deemed distributed if you miss your payments.
How Long Is This New Increased Loan Option Available?
The new loan option is available 180 days from enactment of the law. The bill was signed into law on March 27, 2020, and as a result, the increased loan amount option will be available until September 23, 2020. Any loans taken outside of this time period are subject to the normal 50 percent limitation and the $50,000 loan cap.
Hopefully, this will provide all of us some relief.
Marc has 36 years in financial services and 6 years in teaching.
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