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.

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.

Note: the image

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.

Recently, I became aware of the 12th edition of the 401(k) averages book. I hate when someone ruins a book or movie’s ending for me. Soylent Green? It’s people. Sorry about that. In this case, I suspect you’re not planning to order the book (for $95) so I’ll not worry too much about ruining the ending. 1.08%. That’s the total cost for the average large retirement plan, over 1000 participants. For a smaller plan, the average costs rise to 1.24%.

Ideally, your 401(k) helps you to take pretax money, otherwise taxed at say, 25%, and delay the withdrawal until retirement, when you plan to be in a lower bracket, 15%, or so you’d hope. You see what’s happening here? Your goal is to save about 10%, a bit more with the effect of the tax-deferred compounding. It doesn’t take long for a 1% or higher fee to negate this savings completely. Say you are about to receive $1333 in pay. You have two choices, to deposit it pretax in the 401(k) or to pay $333 in tax, netting $1000 and invest that in a Roth IRA. After 20 years of growth at say, 8%, the $1333 grows to $6213 in the 401(k), but a 1% fee reduces this to 7%, returning $5158. Ouch. After 15% tax, you have $4385. In the Roth account, the $1000 grows to $4661.

The 1% is just an example, actual fees run as high as over 2%, a cost I consider criminal. Little wonder that Broker-dealers up in arms 401(k) fee disclosure. You see, there’s a new rule scheduled to take place on April 1, 2012. It requires disclosure of the fees within all 401(k) accounts. Only, this April, the joke will be on us, as the average 401(k) account charges such high fees that most participants should stop depositing after the match, and a good number of plan providers in the 1.5% and above should probably be sued for not offering reasonable investment choices.

Most advisors agree that 4% is the amount you can comfortably withdraw each year from your retirement account. When the fees are 1% per year, there’s 3% for you and 1% for the fat cat on Wall Street who sold this plan to your employer. Me, I’d rather switch than get knocked out, unlike the guy in this classic cigarette ad.

First, let’s start with The Car Negotiation Coach’s Auto Industry Trends: 2015 and Beyond Will Be Great for Car Buyers. I like forecasts. Not because I believe the experts all the time, I’m still waiting for my food replicator, after all, but because those who study an industry can often see the trends. In this case, the Coach offers 12 long term trends he sees. I like his prognostication that we’ll be buying cars without having to even go to the card dealer. I also am as hopeful as he is that the Electric Car will become more prevalent.

At Five Cent Nickel, Lisa White wrote Accelerating Your Mortgage Payment. A decent discussion of the bi-weekly mortgage, along with the decision to pre-pay principal each month. I understand the desire to be debt free. No one ever lost sleep knowing their mortgage was paid in full. On the other hand, current mortgage rates are now at record lows. I am now in a 3.5% 15 year fixed rate. Years ago, I’d have bet I’d never live to see a sub-5% mortgage. This also means my after tax cost is 2.5%. With many stocks yielding more than this, the prepaying vs long term investing is one tough decision.

Personal Finance Whiz asks How Much Should I Have Saved for Retirement By Age 30? What I found most interesting was the graph showing the remarkable difference the next 30 years of compounding would bring, ranging from a probably too low 3%, to a high of 12%. It was the difference between $500K and $5.5M. It’s not just about saving, but also getting a decent return.

37 Must-Read Posts for Tax Savings was an excellent resource at Money Spruce. ‘Tis the season, as they say. Tax day isn’t far behind.

Fabulously Broke asked Am I the only one who does this? She used to imagine the things she’d like to buy with that next pay check. Me? I imagine much larger windfalls, tens of millions, but that’s another story.

Last, but most exciting of all, is my refreshed guest post at Don’t Mess With Taxes, titled How your future retirement tax bracket affects today’s Roth IRA decisions. The choice we have each year between investing pre tax in the traditional 401(k) or IRA, vs the Post Tax Roth variants of these accounts isn’t so clear cut. In my guest post at Kay Bell’s site, I go into a deep dive of the numbers. It’s an important decision, choose wisely and you’ll be richer for having done so. Choose wrong, and Uncle Sam will benefit.

Mitch may make a good candidate after the current crop of hopefuls destroy themselves.

Take a couple who has made a decent income, $150K-$200K, and after selling their home, decides to take their retirement fund, and rent. They have exactly $4M. They don’t trust the stock market to go back to annual returns of 8-10%, and therefore they only withdraw $120K per year. (Remember, this is a retired couple, whatever their profession, let’s just agree they lived well beneath their means to save this money. They paid their taxes, but invested for the long term, much of it pretax.) The seemingly ‘fair’ 3% is $30K of the excess $1M they have. And it’s 25% of their annual budget. If the entire $120K withdrawal is a 401(k) or pretax IRA distribution, they are already planning to pay about $17K in tax, living off the $103K net. This tax would leave them with $73K.

At $5M, the numbers look even worse for this couple. Planning to withdraw $150K gross, and pay closer to $25K in tax, for a net $125K. Now take off $60K for the wealth tax, and they are left with $65K. Uh, right, they socked away an extra million dollars, but this wealth tax leaves them with a lower annual income. “But Joe, the wealth tax can come off the top, not from the withdrawals.” Agreed. but in the 25% bracket, it would take an extra $80,000 withdrawal to net the $60,000 for the $5M couple. They went from a pretty conservative 3% withdrawal target to $230K, a 4.6% rate. Something about this doesn’t seem right. Yet, when you paint a different picture, the 30 year old Wall Street Exec who has already built a $10M retirement account, the tax doesn’t seem so bad.

When it comes to the tax code, it’s very difficult to have a tax that doesn’t hurt those who are not the intended target. It’s easy to make judgments about who has really earned their money. I for one think there are hundreds of bankers involved in the Mortgage Collapse who deserve long jail sentences. The same folk at S&P who decided when you take enough C rated paper and put together, you can get AAA investments are the ones who pulled Uncle Sam’s AAA rating. These are the people who made us all poorer, along with our children who will inherit the national debt. Why these people are still on the streets (I mean employed and not serving time) I don’t know.

What do you think of the wealth tax? Have you seen any articles on it yet?

Blogger Luke Landes guest posted at Business Insider, a thoughtful article, Yes, There is Such a Thing as Saving Too Much Money. It’s as much about the journey as the destination. Saving to the point you are not happy is certainly saving too much.

New Year resolutions are behind us (you’re keeping up with yours, right?) but Financial Samurai Predictions for 2012 is a great read. 10% on the S&P would be great to see this year.

The Enemy of Debt Brad Chaffee telld us that American Consumers Dive 5.6 Billion Dollars Deeper in Credit Card Debt in One Month. Truth is, this is barely $17 for every person in the US, but it’s accumulated to a $2.5 trillion total. Now you’re talking some real money.

At Beating Broke, advice on how to Save Money by Turning Off Appliances. In a comment, I shared my own experience, an extra computer I left on, till I realized it burned $20 a month in electricity. At 15 cents per kilowatt-hour that’s what a 180W device will cost you.

At The Millionaire Nurse, Dr Dean wrote A Million Bucks? In My 401K? Ya Gotta Be Kiddin’!  No kidding, it’s possible, and takes dedication to putting away as much as you can. The company match helps, of course. Are you maxing out your 401(k) contributions? Are you at least getting the company match?

And to wrap up this week, Len Penzo dot Com’s Roth IRA and Traditional 401(k) Differences – Which Is Better? The biggest missing piece to the puzzle is the not knowing where rates will be in the future or for that matter anything else about the tax structure. This leaves us with a tough decision to make each year.

Another great week of blog reading. Stay warm.

When asked what his tax rate is, Romney responded “15%.” No surprise, this is the rate for dividends and long term capital gains. This isn’t likely to go away, as those with money make big donations to the campaigns of the congressfolk who make these laws. Thus the old line, “Is that a congressman in your pocket or are you just happy to see me?”

Gonna have to disagree, Joe. Hear me out:

First on administration cost: Typically a third party administrator bills the employer a monthly fee per enrolled employee. However, depending on the average election, the employer is usually saving much more in taxes per employee than the monthly fee incurred, based on their FSA funds coming off of payroll.

Now the alternative to an FSA would be itemizing deductions on a Schedule A, which is currently limited to expenses greater than 7.5% of your adjusted gross income. As we know, itemizing deductions greatly increases the risk of triggering an IRS audit. For the average person this is a complex procedure to be able to enjoy all the benefits of an FSA (saving receipts, making sure you have your RX for tylenol, etc.), and the penalties and government administration of these expenses would be far higher than FSA administration. Further, this would also likely increase the administration at tax service centers such as H&R block.

So far from being overly complicated, the FSA actually simplifies the tax process for the participant a great deal, simply by removing these funds off their W2. Without question, the average person currently receiving tax benefits on their FSA would not get the same benefits on itemized deductions. And any “efficiency” costs would be rendered moot by greater IRS auditing procedures and third party tax preparers. As far as the government is concerned, the plans are a win-win-win benefit. Win for the government: outsourcing administration to a private party; win for employers: receiving a tax benefit simply by having a plan in place; and win for the employee: removing these funds from their W2 to enjoy their tax savings.

Also, technology is simplifying the FSA process a great deal. We have FSA debit cards that can process transactions at the point of service: eliminating the reimbursement process. We have smart phone apps that can read your documentation and automatically submit for reimbursement/adjudication. We have dependent care affidavits that only have to be set up once and automate the reimbursement process for the rest of the year.

Rather than scrapping the Flexible Spending program, we should really be expanding it. Some of the proposed legislation would have fixed some current issues with the plans: add a possible roll over for unused funds, allow for OTC items without an RX, and possibly even use the accounts for health and wellness expenses such as gyms and exercise programs.

It does look like the current administration would like to kill the FSA, which would be unfortunate. They are probably one of the main tax benefits working class people can enjoy, besides maybe the EITC.

I will say though that employers would do right by getting a quality administrator for their plan, rather than just looking for the lowest cost.