Senators Want to Limit 401(k) Borrowing, Ease Repayment Rules
May 18th, 2011U.S. Senators Herb Kohl (D-WI) and Mike Enzi (R-WY) introduced a bill today that would provide additional flexibility for people who borrow from their 401(k) plans, while limiting some loan practices.
Amid difficult economic times, some 28 percent of active participants in defined contribution plans have an outstanding loan, according to a recent study by Aon Hewitt. For readers unfamiliar with 401(k) plan loans, participants essentially borrow the money they have saved in the plan at a low interest rate and pay themselves back over time. (Sound enticing? See this link for why 401(k) loans are usually a terrible idea.)
“As the frequency of retirement fund loans have gone up, the amount of money people are saving for their retirement has gone down,” Kohl stated in a press release. “While having access to a loan in an emergency is an important feature for many participants, a 401(k) savings account should not be used as a piggy bank.”
The SEAL Act (Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011) proposes these changes:
-Extend the Rollover Period for Plan Loan Amounts: When an employee with an outstanding 401(k) loan loses his or her job, he or she must repay it immediately (typically 60 to 90 days). If the person is under age 59-1/2 and can’t come up with the money quickly, the Internal Revenue Service treats the loan as a distribution, and slaps the person with a 10 percent penalty and income taxes. (Someone in the 25 percent tax bracket who borrows $20,000 from a 401(k) would hand over 35 percent of the money — or $7,000 — directly to Uncle Sam.)
The SEAL Act would allow an employee to contribute the amount outstanding on their loan to an Individual Retirement Account (IRA) by the time they file their taxes for that year, giving them a little more breathing room on the I.O.U., and potentially avoiding penalties and taxes.
-Allow 401(k) participants to continue to make elective contributions during the six months following a hardship withdrawal: Right now, after a worker makes a hardship withdrawal from a 401(k) plan, she or he is prohibited from making elective contributions to their retirement account for at least six months. The SEAL Act allows participants to continue to make contributions during the six months following a hardship withdrawal.
For my money, the IRS is pretty liberal in its definition of hardship, which is defined as a financial need that is “immediate and heavy” and cannot be met with other resources. It can include true emergencies (hit by a truck, house burns down, landlord threatening eviction, funeral expenses) to the I-didn’t-plan-so-well type of calamity, such as college tuition and costs related to the purchase of a principal residence. Holy cow, who knew lenders charged so many fees to close a mortgage? Better tap my 401(k)! This is a pricey lack of planning because hardship withdrawals are subject to penalties and taxes.
Workers whose financial fortunes suddenly rebound (lottery, inheritance, Monet found underneath the velvet painting in the garage, teen chosen to replace Demi Lovato on the Disney Channel) would be able to contribute to their plan immediately after the hardship withdrawal.
-Reduce the overall number of loans that participants can take to three at one time: Currently employers determine the number of loans available. Kohl and Enzi argue that the administrative burden of managing multiple loans for a few individuals can increase the costs for all workers in a plan.
-Ban products that promote active borrowing, such as the 401(k) debit card: Kohl and Enzi want to prohibit products such as “401(k) debit cards,” that allow people to dip in and out of their retirement savings like a teen in a mall with Mom’s Amex. These products typically carry hefty fees.
The question is whether the bill’s new limits would discourage workers from joining a plan in the first place. Since it’s a minority of workers who take multiple loans over time, and 401(k) debit cards are typically a rotten deal for consumers, the legislation isn’t proposing radical limitations. And clearly workers need a break from penalties that ensue when they are laid off and have an outstanding 401(k) loan, because it doubles the financial whammy of losing the job.
Kohl, a champion of retirement protections, announced last week he is resigning from the Senate and will not seek reelection.
Have you ever borrowed from your 401(k)? Good solution or bad idea? What’s your view of the bill? Comment here or email me at laura at laurarowley dot com.
- The Pitfalls of 401(k) Borrowing
- 529 Pain
- Retirement Worries Grow
- Blaming Each Other for the Financial Crisis
- Understanding Flexible Spending Accounts
Tax Refunds Delayed
May 17th, 2011Have you received your tax refund yet? We filed our personal returns electronically on April 11 and still don’t have the money. That despite the fact that the average time to receive a refund for a return that was filed electronically is three weeks, according to the Internal Revenue Service customer service agent I spoke with today. (Other officials have said electronic filers could receive their refunds in as little as ten days. That means ours should have been deposited into our bank account sometime between April 25 and May 2.)
The IRS service agent told me that the refunds have been delayed this year because the IRS is manually reviewing returns that claimed the first-time home buyer credit. (The New York Times covered the topic here.) We didn’t claim that credit on our return, but the agent told me the review of those who did is causing a backlog for everyone. The Times noted that the I.R.S. must pay interest on the refund it owes you if the agency doesn’t pay it within 45 days after the due date of the return (April 18 for this year).
Twenty-one business days and counting…
Let me know if you’ve experienced a delay in receiving your refund. Comment here or email me at laura at laura rowley dot com.
In the meantime, here’s a link to my recent interview with Ben Merens of Wisconsin Public Radio on money and happiness.
- Beware the IRS Phishing Scam
- Refunds for Baby Einstein Videos
- Top Mistakes in Doing Taxes
- Sotomayor Gets a Windfall: Karmic Justice?
- File Taxes for Free & Other Bargains
Join me on WPR Tonight
May 13th, 2011I’ll be chatting talking about debt and American culture tonight on At Issue with Ben Merens on Wisconsin Public Radio from 6pm to 7pm EST. I love this show, we get terrifically thoughtful questions from listeners. The basis for our conversation is a column I wrote for Yahoo!Finance this week, “How Debt Has Become the American Way,” which covers new research on the philosophy of debt.
Michelle Barnhart, assistant professor of marketing at Oregon State College of Business, and Lisa Penaloza, professor of marketing at Ecole des Hautes Etudes Commerciales du Nord in Roubaix, France, interviewed 27 white, middle-class Americans about their finances and philosophies toward debt in granular detail from 2005 to 2006. The study appears in the May issue of the Journal of Consumer Research.
As institutions and consumers adopted new rules, habits, and ways of thinking and talking about credit and debt, living in the red became the norm, the researchers found. As one participant noted, taking on debt “is the American way.” Participants had widely conflicting views of what debt means. Some described credit as positive, richness and worth, free and borrowed money, and getting something with nothing. Some compared it to a savings account. Others described it as an obligation, negative, scary, something cumulative, the result of abuse, and simply, what they owe. What does debt mean to you, philosophically? Comment here or email me at laura at laurarowley dot com.
We’ll dive deep into the factors that have made debt a norm tonight. Join us for the conversation.
- Why Budget Shoppers May Be More Likely to Overspend
- Reward Credit Cards Don’t Help Build Savings
- Let the Budget Be the Bad Guy
- People Who Understand Compounding More Motivated to Save For Retirement
- More Factors that Affect Wealth-Building
Mother’s Day Deals & Steals
May 5th, 2011Mother’s Day is almost upon us…you have just a few days left to find a gift for the noble woman who bore you. I gave birth to my oldest child three days after Mother’s Day back in 1997. I vividly recall that Sunday, because I bought a 20-pound potted plant at a street fair and carried it up to our New York apartment, scaring the wits out of my husband, who thought this would bring on early labor. No such luck. Instead, I got home from work at 5pm on Tuesday night and gave birth 17 hours later.
By the third child, we were both so blasé about the labor thing that he headed off to a Giants football game when the contractions were 30 minutes apart and I let him. (He only made it to half time, though.)
In any case, to help you prepare for the holiday, check out some Mother’s Day deals over at Julia Scott’s blog, the Bargain Babe. She has scoured the web for great deals on flowers, cards, gifts, a free breakfast and free entry to public gardens across the U.S.
What could be better than stopping to smell the roses with Mom?
- File Taxes for Free & Other Bargains
- What’s Your Gameplan?
- Valentines Freebies from the Bargain Babe
- Thanks to Folks Who Make It Easy to Give
- This Week’s Freebies from the Bargain Babe
How to Double A Child’s Odds of Attending & Graduating College
April 26th, 2011Middle- and lower-income parents can double their children’s chances of attending and graduating college simply by opening a savings account for them, according to a new review of 38 studies on the relationship between assets and children’s educational attainment by researchers at Washington University in St. Louis.
You may be thinking, well, duh: People who make a lot of money save up to send their kids to college, and those people probably went to college themselves. But the studies controlled for family income and the head of household’s education level — as well as for employment and marital status, number of children and academic achievement. After controlling for those factors, researchers found that children who have designated a portion of their own savings for school purposes are approximately two times more likely to be currently attending college or have already graduated.
Examining differences across income groups, a 2010 study found that among low-to-moderate income children, those who have savings earmarked for school are also about two times more likely to be currently enrolled in college or already graduated. (In the case of high-income children, the children’s savings is not statistically significant.)
But it’s a non-financial factor matters even more: Expectations.
When children expect to graduate from a four-year college, having basic savings is associated with children being approximately six times more likely to attend college. The research appears in a forthcoming issue of Journal of Children and Poverty.
Researchers are not certain whether savings predict college expectations or vice versa. One study found that savings has a slightly stronger relationship with children’s expectations than expectations has with savings, noting: “Savings first provide people with otherwise unattainable opportunities to hope, plan, and dream about the future for themselves and their children.”
Others suggest a two-way causation, or virtuous circle. But both attitude and action are important to the goal. As one study noted: “When children and their families save money for college, the meta-message asserts ‘we save’, ‘we go to college’, reinforcing the college-bound identity.”
With the cost of college up more than 70 percent after inflation over the last two decades, saving for education is no longer a luxury, but a necessity. Opening a 529 plan is a great way to start. Check out this post for more. Morningstar rates the best and worst of these plans (you have to register for the site but can access the report for free).
- Will A College Education Become A Luxury?
- The Value of College Ain’t What It Used To Be
- Help Build Schools for Peace
- Simplifying the College Cost Quest
- Student Loans Are Not “Good” Debt
Jobless Who Hang Around Employed Friends More Likely to Find Work
April 19th, 2011If you’re unemployed, spend time with your friends who have jobs — you’re more likely to find a job and be offered a better salary than if you hang around with other unemployed people, according to new research being presented this week in Britain at the Royal Economic Society’s 2011 annual conference.
Lorenzo Cappellari of Catholic University of Milan and the Institute for the Study of Labor (IZA) in Bonn and Konstantinos Tatsiramos of IZA and the University of Leicester analyzed data from the British Household Panel Survey between 1992-2005. They found that for an unemployed individual, having one more employed friend:
- Increases the chances of finding a job by as much as 18%.
- Increases the likelihood that the new job is well paid.
- Reduces the chances of falling back into unemployment.
A pair of U.S. researchers found something similar: Social interactions between neighbors are an important source of job referrals, especially if the neighbors are of similar age and education, and have children of the same age. Duke economist Patrick Bayer, Stephen Ross of the University of Connecticut, and Giorgio Topa of the Federal Reserve Bank of New York published their findings in the ‘Journal of Political Economy’ in December 2008.
Examining 1990 Census data, the researchers looked at neighbors in the Boston area and found that residing on the same block (versus on nearby streets) increased the probability of working together by 33 percent. The “referral effect” benefits were greatest for neighbors who were well-matched in terms of education and age: Those men tended to earn 4 to 6 percent more, suggesting that they were finding better positions through their neighbors. There was no salary effect for well-matched women, but they were more likely to be in the workforce.
How important are connections? How did you find your last job? What’s your advice for the unemployed?
- Everybody’s Working for the Weekend
- How to Double A Child’s Odds of Attending & Graduating College
- Is Your Personality Hindering Your Paycheck?
- Why Budget Shoppers May Be More Likely to Overspend
- Survey: Who’s Happy? High-Earners, Older People, Republicans
Gas Prices, Tax Refunds and Coupons, oh my!
April 15th, 2011My husband and I play a version of reverse musical chairs with our car: Whoever is sitting in the driver’s seat when the gas light comes on has to fill the tank. I lost this morning, and it set me back $53. This is for a Kia Optima, which gets 23 miles per gallon. (Just last fall I was paying about $35 for the same fill-up. I swear the next car will be a hybrid.) You can fight higher gas prices with these tips and these Iphone apps, which I posted over on RealSimple.com.
While you’re there, check out my recent posts on paying kids for grades (do you or don’t you?) and top stresses at work. That is, of course, if you do work, which the majority of Americans don’t, according to a new analysis by USA Today. Just 45.4 percent of Americans held jobs last year, a consequence of the ailing economy, aging population and a plateau in the number of working women.
The decline in the workforce raises a thorny question, namely: How will 45 percent of the population shoulder societal costs, such as schools, highways, Medicaid, etc., for the other 55 percent if the situation continues? As John Goodman, president of the National Center for Policy Analysis, noted: “No matter how wealthy you are, you have a problem if half the population is not working and depending on those who are.”
Speaking of taxes, today’s Yahoo!Finance column looks at what to do with your tax refund. A reader named David emailed me: “I’m taking my refund money and putting it into Gold and Silver. By the time I get my refund check and it clears my bank account it will be worth less then it was sent, because of the continued decline of the dollar. So I’m going to put it into something that will actually keep its value.” Sounds a little speculative to me. Anyone want to weigh in on metals? Are they a bubble ready to burst or do they have a place in a diversified portfolio?
Would you use your tax refund to buy gold?
Finally, let’s talk coupons. Perhaps I have a case of frugal fatigue, because I haven’t clipped coupons in a while. Which is why this story on extreme couponing, a new reality show on TLC — caught my eye. These folks are investing a LOT of time clipping, so I have to wonder how much the savings cost per hour of time. And then there’s the price of storage: Some of people featured on the show have to rearrange their homes and build shelves to accommodate their bulk purchases (we’re talking 3,000 rolls of TP). I suspect there’s a bigger psychological issue here related to hoarding. In any case, if you’re into coupons, Julia Scott over at the BargainBabe has a random assortment of fun freebies, including eggs, candy, diapers and more.
I’m taking my refund money and putting it into Gold and Silver. By the time I get my refund check and it clears my bank account it will be worth less then it was sent, because of the continued decline of the dollar. So I’m going to put it into something that will actually keep its value.
- Tax Refunds Delayed
- Avoiding Overdraft Fees with Account Alerts
- Calculating APR on an Overdraft Fee
- Beware the “Failed Bank” Email Scam
- Beware the IRS Phishing Scam
File Taxes for Free & Other Bargains
April 8th, 2011I tortured my children this morning with my personal rendition of “Friday” by Rebecca Black (…Partyin’, partyin’ (Yeah)/ Partyin’, partyin’ (Yeah) / Fun, fun, fun, fun /Lookin’ forward to the weekend…) They did not appreciate my efforts, although we all loved the version by Stephen Colbert on Late Night with Jimmy Fallon. (Search for it on YouTube.)
In any case, contributor Julia Scott, dealmeister extraordinaire over at the Bargain Babe, offers up a better way to kick off the weekend — with some spectacular savings. Taxpayers who haven’t finished their returns yet should check out her five ways to file for free. (Ten days left and counting…tick, tick…) Julia also offers eight tasty wine options under $10 to make the activity a little more palatable.
Meanwhile, here’s a tip from behavioral psychology: When doing taxes, just plow through to minimize the pain. Don’t stop and take a break, because when you return to the task it will be even more distressing. (See this column for more.) And when you wrap up your returns, you can check out Julia’s 100 fun and frugal family activities. Here are links to today’s Bargain Babe deals:
1. Five ways to file your taxes for free.
2. Eight wines worth sipping for less than $10.
3. Best drugstore rewards programs.
4. How to save money at Whole Foods.
5. 100 frugal and fun family activities.
- Top Mistakes in Doing Taxes
- Friday Bargains Galore
- This Week’s Freebies from the Bargain Babe
- Mother’s Day Deals & Steals
- Valentines Freebies from the Bargain Babe
Unemployment Is Deadly, Especially for Men
April 6th, 2011People who lose their jobs risk an early death, and men are particularly vulnerable, according to a new study by researchers at McGill, Stony Brook and Columbia Universities. Unemployment increased the risk of premature death by 78 percent for men and 37 percent for women, according to the study, which examined records covering 20 million people in 15 countries over the last four decades.
Men under age 50 were at greater risk than those closer to retirement. “We suspect that even today, not having a job is more stressful for men than for women,” said McGill sociology professor Eran Shor in a press release. “When a man loses his job, it still often means that the family will become poorer and suffer in various ways, which in turn can have a huge impact on a man’s health by leading to increased smoking, drinking or eating and by reducing the availability of…health care services.”
Previous research on unemployment did not control for pre-existing conditions such as diabetes or heart problems, or behaviors such as smoking, drinking or drug use. The new study, which appears in the March issue of Social Science & Medicine, accounts for those factors. “We found that preexisting health conditions had no effect, suggesting that the unemployment-mortality relationship is quite likely a causal one,” Shor stated. The best way to beat the odds: Take care of yourself if you get laid off. Exercise, don’t smoke, eat right and don’t drink to excess.
- Give Up Health Insurance?
- How to Derail a Teen’s Financial Future
- New-School-Year Resolutions
- Sotomayor Gets a Windfall: Karmic Justice?
- Career Detours
Citi To Offer Consumer-Friendly Check-Clearing
April 4th, 2011Citibank wins the prize today for fairer consumer practices. According to the Associated Press, Citi will begin clearing customer checks in a way that minimizes the potential for multiple overdraft charges starting July 25.
I’ve written quite a bit about this practice in the past (see this story) in which banks process the largest check in a batch first in an effort to maximize overdraft charges. A 2008 study by the firm Bretton Woods found three-quarters of banks had adopted this policy (see this story). The research also found 80 percent of overdraft fees were incurred by 20 million households, who paid an average of $1,374 in overdraft fees.
It works like this: Let’s say the person has $1,450 in their checking. The person writes five checks for $100 and a rent check for $1,200, for a total of $1,700. They all arrive together at the bank (the day before the person gets his paycheck automatically deposited in the account). The bank honors the rent check first, and then after the first two smaller checks clear, the other three bounce. If the bank had honored the smaller checks first, there would be just one overdraft fee rather than three. (I used all checks in this example because that’s what Citi’s policy will apply to; Citi does not process overdraft debit transactions or ATM withdrawals.)
If you’re worried about overdrafts, sign up for your bank’s email alerts that let you know when your balance has fallen below a certain level. Also, don’t pay for stuff in 17 different ways from six different accounts because it’s too easy to lose track. I use a debit card and online billpay, and write everything down in a check register — so I always know where I stand. Everything is linked electronically to a budgeting software so I see the funds come and go in one place. How do you keep track of your money? Comment here or email me at laura at laurarowley dot com.
