JoeTaxpayer

Unemployment for those 16-24 is still running 16%. This includes new college graduates. While the graduates rate is certainly lower than this average, the number of jobs available is not keeping up with demand, yet the cost of college hasn’t fallen, and these graduates are saddled with debt.

Didn’t you know? The 401(k) loan is broken. On one hand, it’s a cheap way to borrow, the rate is currently about 4%, a great way to put more return into your retirement account, as other risk free rates are far lower, but with these benefits comes great risk, the risk that if you lose your job, you have a short amount of time to replace the money or pay both a 10% penalty and tax at your marginal rate. To make matters worse, even if you change jobs, it’s quite the trick to transfer the 401(k) from the old job to the new one and take the new loan out in time to pay the old. I’ve heard of people doing it, but it’s not as easy as it should be.

I don’t view routine borrowing as something to encourage. However, as part of the big picture prudent borrowing can help jump start one’s savings. For example, a $60K earner with a newborn finds that the budget is pretty tight, and being risk averse decides his emergency funds are too low. As the wife isn’t working and may not return for a year, he decides to stop his retirement contributions. Since the first 5% of his income would have been matched, this decision to not deposit this $3000 results in a loss of $6000 for his retirement. With different loan rules, he might view the loan risk a bit differently, and keep up the deposits, knowing he’s able to borrow the half he deposited.

When it comes to the 401(k) loan, there is nothing stopping congress from passing new rules. “If separated from the employer, the plan participant’s loan payments are suspended for as long as the unemployment lasts.  When employed at a new company, the remaining balance is directly transferred along with the fact that there is a loan in place with the same terms and remaining balance as the original loan.” Congress, are you listening? What if the worker doesn’t regain employment? I’d suggest it’s bad enough to have someone out of the workforce, do we really want to chase them for the tax due on their loan?

I did one calculation, $10,000 owed to a credit card at 18% paid over 5 years will cost $254/mo. The same $10,000 taken as a 401(k) loan would be paid in 42 months using the same payment. 3-1/2 years instead of 5. And during that time, 4% going into the account instead of the sub 1% a short term government bond fund will return. In the big picture this may seem a small issue, but it’s one way those without the ability to borrow at low rates are getting the short end of the stick. On one hand, these loan are available and can be used to one’s advantage, but the flip side is the risk is too high for many. This small change can fix the 401(k) loan.

Today is Superbowl Sunday, which I suppose means little outside the US, but it’s especially exciting for those in the Northeast as the N.Y. Giants (who play in New Jersey) meet the New England Patriots, a rematch of the 2008 teams. As someone who grew up in NY, I’m a bit torn between rooting for my old home team and my current home’s team. So much for the sport talk, time for another recap.

First, an update. Just a few days ago, I asked if you were getting 401 K-O’ed, overcharged by your plan. In that article, I mentioned that rules regarding full disclosure of the fees charged within 401(k) accounts would take effect April first. This week, I found that 408(b)(2) Disclosure Regulations are Delayed to July 1, 2012. So it appears the joke will be on us twice, the traditional April fool’s day, and again three months after.

Next, in the wake of Suze Orman’s Twitter meltdown regarding her debit card, the Wall Street Journal reported that the data in a newsletter she co-owns, “understated the performance of the S&P 500” which of course exagerated the relative performance of its model portfolio.  Time for the next round of damage control, I suppose.

Note: the image above is a bowl of San Antonio Chili from Another Fine Meal. A great addition to your Superbowl Menu.

Andrew Tobias discussed Double Taxation and why the claim that all cap gains are from money that’s already been taxed doesn’t stand up to scrutiny. As I view this issue, the average person gets very little in cap gains as most of our savings is probably in retirement accounts, not in regular brokerage accounts. The loopholes that allowed hedge fund managers to turn all their income to cap gains while stealing investing other people’s money should be closed down.

Ron at The Wisdom Journal produced a list of 57 Avoidable Tax Mistakes. Amazing list, worth reading. If I read this years ago, I might have not forgotten to sign my return. Yes, they sent it right back. I was getting a refund that year so no penalty or interest due.

At Free Money Finance, Why You Shouldn’t Count on Social Security. Not that it won’t be there, just that the replacement rate is low enough that for most of us it will only be one component of our retirement funds.

The Financial Buff shared Best Rewards Card for Groceries and Gas: American Express Blue Cash Preferred vs PenFed Platinum Rewards. A 6% back at grocery stores? Hmm, that might just be worth getting.

If Romney is to stand a chance, he needs to start using a teleprompter or at least prepare a bit better. To be fair, the line “I like firing people” was taken out of context, the full speech discussed not being stuck with one particular health care provider, “firing” those who don’t offer good service. Fair enough? Mitt’s “I’m not concerned about the very poor” will be tough to recover from. Unfortunately, it leads to the conclusion that he is far from being in touch with the common man. He says the poor have a safety net. That safety net over a year’s time is about as much income as Romney makes in about an hour, give or take.