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As We Move Forward

11/23/2021

Buying a Home Through a 401K Withdrawal

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Many would be home buyers consider the down payment to be the biggest hurdle to buying a home.  The standard down payment is 20% to obtain a mortgage without the added expense of mortgage insurance fees. The down payment expectations have potential buyers looking for funding options.  Many borrowers consider using a 401(k) retirement fund as a source for these funds.  There are pros and cons to consider before removing funds from a 401(k) fund. 

A 401(k) is a convenient method for saving because it is deducted directly from a paycheck. Regular contributions add up resulting in a 401(k) fund accumulating a considerable balance over time. However, 401(k) account plans were created to help prepare for retirement.  Therefore, 401(k) rules have incentives to save the funds and penalties for early removal of the funds.

Withdrawals made before the account holder turns 59 ½ can incur a 10% early withdrawal penalty on the amount of money taken out of the account.  The withdrawal immediately becomes subject to income tax because it is no longer protected in the retirement savings account. You also lose the potential growth on the original balance.

If you want to pay back the funds you can obtain a 401(K) loan.  Although, not all employers offer this option with their retirement plans.  If you are able to qualify for a 401(k) loan, you can avoid the 10% early withdrawal penalty and the loan funds will not be subject to income tax. However, you will have to pay back the loan with interest.

Before considering the use of funds from a 401(k) plan review the plan options, determine if sufficient funds are available to meet the expected 20% down payment and that there are no better options available. 

The purchase of a home is a big commitment.  For more information on mortgage options contact a loan officer at Pan American Bank & Trust.

Important Note: Nothing in this article constitutes investment, tax and/or financial advice.  All investments have risk and may not be suitable for everyone.  You should seek advice from an independent financial advisor.


11/10/2021

Saving Strategies for the Fall Season

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As the Fall season is underway, there is much to look forward to: pumpkin flavors abound, snuggly sweaters, stylish boots and beautiful landscapes that surround us in splashes of orange, red and brown. Fall is also a great time to take stock of the upcoming events that will affect budgets and finances. Planning ahead for holiday expenses such as travel, hosting, gifts and entertainment will ensure your bank accounts are in good shape to start out the new year.

Several steps can be taken to avoid over-extending the budget and creating debt. For instance, draw up a list now of all the preferred holiday activities so decisions can be made as to which to partake in and which not. Also, establish a Christmas list with a definitive budget and exact amounts per person, therefore avoiding unintended overspending or additional gifts purchased. While making these decisions, keep in mind your financial goals and actual budget, not assuming expenses will be paid off in the future.

Fall is also usually the season that homeowners realize home improvements are necessary. If you have not done so already, it is highly advisable to put funds aside monthly as a reserve for home repairs. An appliance may need to be repaired or replaced at any time and having money aside for that purpose is such a comfort. This is especially the case on one of those snowy, freezing winter nights when a furnace stops working and it needs to be repaired quickly. A yearly tune-up to a furnace during the fall is also a great idea to avoid such a scenario. Other great ways to prep your home for winter and avoid expensive repairs: clean or replace furnace filters, repair any roof damage, ensure all insulation is intact and replace all smoke detector batteries.

Another smart financial strategy for the Fall season is regarding health care. The Fall is typically the period for open enrollment for many companies and adjustments can be made to health care plans. Consider the plan currently being utilized and decide if it is the plan that best meets your and your family’s needs. Also pay close attention to HSA or Flexible Spending Account contributions. Since these funds are deducted on a pre-tax basis, up to 30% can be saved. However, once the funds are in the account, they can only be used for medical expenses. If all of the funds are not used, they cannot be withdrawn for any other purpose. Is the amount contributed to the account typically used within the year time frame? If there is a significant amount of money left over, perhaps less money should be allotted for the account. Different IRS rules apply to HAS’s and Flexible Spending Accounts, so it’s always a good idea to consult your tax advisor.

Fall is also a great time to take advantage of major discounts and sales. Halloween, Veterans Day, Black Friday and Small Business Saturday, which is the day after Black Friday, are all great days to Christmas shop or stock up on household necessities like winter gear, kitchen items or even a new vehicle. With the holidays approaching, any item that can be purchased at a discount is a bonus. Having a list of all items that will be needed for the holidays, including food, decorations, gifts and household items will be beneficial when searching on discount days.

Overall, the Fall is a great season to stock up and look forward to the Holiday Season, new beginnings and establishing a financial reset to achieve greater financial goals. All of this can be thought through while sipping some pumpkin spice and roasting smores over a bonfire on a crisp evening that can only be enjoyed in the Fall.


11/4/2021

Bank Statements – Toss or Keep?

Cropped shot of a senior woman going through her finances while sitting on the sofa at home.

If you are like most people, you have more than one bank account. By law, financial institutions must issue a statement for each account each month there is activity on the deposit account. By the end of the year, that can total to a large number of statements that need to be archived. This leaves one to question if holding onto all of those statements is really necessary. Here are the facts regarding the IRS period of limitations and the breakdown of what is absolutely needed and for how long.

The general rule is to keep all bank statements for three years. Keep in mind that two years’ worth of bank statements are usually used when gathering information for most financial transactions such as loans, renting a home, filing taxes or any other decisions that require income verification. However, the IRS and many states can request up to three years’ worth of tax returns when conducting an audit, requiring bank statements as backup. Consequently, it’s best to keep up to seven years of past bank statements. That is also the length of time in arrears that statements can be reviewed if one is suspected of underreporting income.

Most banks will also keep your records on file for at least five years, some even seven. It may be useful to contact your bank to find out how long they will store statements and depending, save yourself the hassle of storing them yourself. There are of course several paperless options so as not to accumulate boxes of statements. Bank statements can be scanned into folders onto your computer or they can be sent to you electronically and saved directly without ever being in a paper format. If you choose this option, consider using a backup device to avoid losing precious documents if the device the statements are stored on crashes or is lost.

However, if you do prefer paper statements, have a dedicated file cabinet in your home for the documents and organize them by financial institution, type of account and year. Once a year go through the documents to eliminate any statements no longer needed and be sure to dispose of them properly by shredding them.

Statements have many relevant purposes since they include useful information used to determine income, deductions and credit. Since the IRS has a period of limitations, there is an end period as to when the IRS can assess additional tax as well as the amount of time you can amend your return, claim a credit or claim a refund. The period of limitations for taxes owed is three years from the date the original return was filed. There is a three-year limit to claim a refund or credit and two years from the date the tax was paid, whichever is later. All of these are great reasons to have access to your bank statements and the pertaining information.

Holding onto older bank statements can assist you in other situations as well. Disputes regarding money owed, proof of purchase dates and insurance claim details can all be confirmed by bank statement information. You will also want to keep bank statement records longer for the following reasons:

  • Up to 4 years if you pay employment tax
  • Up to 6 years if more than 25% of your income is not reported
  • Up to 7 years if you have reported a capital loss

Also note that if you miss filing a return in any given year, the IRS can request an audit at any time. There is not a limit on the time frame you can be audited for that specific reason.

In a nutshell, if filing your yearly taxes is uncomplicated and you know they are filed correctly, you can assume 3 years is long enough to hold onto bank statements. Seven years is a better length of time to keep bank statements if your taxes are not simple, you have investments, or anything in your filing is questionable or out of the ordinary.

Important Note: This article is not intended as legal or tax advice. Consult your legal or tax advisor for guidance.


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