Before you take money from your 401(k)

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Did you ever need money and think about taking a loan or withdrawal from your 401(k) account — but aren’t sure how to do so or if it’s ever a wise move?

You’ve got lots of company. Representatives who take calls for retirement plans say withdrawal and loan requests and related questions consume the biggest portion of their time.

But what it all boils down to when figuring if this is a good idea depends on what you’ll do with the money.

Most financial pundits say never take money from your 401(k) plan because you’re reducing funds you’ll need for retirement. Another good reason to avoid taking early withdrawals is that when you take money out, you’ll pay more income taxes and penalties than you would otherwise. It’s hard to argue against these reasons.

But if the measure of your financial health is your net worth (assets less debts), taking cash from your 401(k) plan to pay off debt has no immediate impact on that. Less money in your 401(k) is offset by less debt.

Look at this more closely. For example, let’s say the funds in your 401(k) plan have been earning a rate of return of 7 percent. But the debt you’re carrying is costing you 18 percent. In that case, taking money from your 401(k) to pay down 18 percent interest debt is the same as earning 11 percent (the difference between the 18 percent interest cost on the debt and the 7 percent earnings on the account).

Here is another example: Let’s say you want to buy a home, but you don’t have enough cash for the down payment to get a good mortgage. Your choices include:

  • Getting a nonconforming mortgage with a higher interest rate and mortgage insurance.
  • Waiting until you save the down payment and miss out on buying that home and possibly low mortgage interest rates.
  • Withdraw or borrow the cash from your 401(k) account and get the house with a low-rate mortgage.

In this case, the last choice might be the best.

The advantage of taking a loan from your 401(k) to purchase a primary residence is that it can be paid back over 15 years or over the term of the mortgage. The loan is qualified as a “principal residence loan,” and the interest paid qualifies as an itemized deduction as “qualified residence interest.”

If you instead take a “hardship withdrawal” from your 401(k), which is permitted for the purchase of a primary residence, then the amounts withdrawn are taxable as income and an additional 10 percent penalty tax is also applicable. Also, hardship withdrawals cannot be paid back into the 401(k) plan.

If your 401(k) plan allows you to take a loan, and you want to do it for one of the financial situations above, then do so. Unlike hardship withdrawals, amounts borrowed through a 401(k) plan loan aren’t taxable as income unless the balance goes unpaid.

An exception to this strategy is that individuals owning a 401(k) plan account with an employer for whom they no longer work typically cannot take a loan. Instead, they can transfer their 401(k) account to an IRA and then take hardship withdrawals that are free from the 10 percent tax, if the distributions are used for things like medical expenses allowed as an itemized deduction, qualified education expenses and qualified first-time homebuyers.

To properly report penalty-free withdrawals from an IRA, you’ll need to complete IRS form 5329.

But when you take a 401(k) loan and later can’t afford to repay it, the unpaid loan balance will become a taxable hardship withdrawal. Hardship withdrawals from retirement plans are typically allowed for things like uninsured medical expenses or to make mortgage payments to avoid foreclosure of their home.

Although those are truly hardship situations, these individuals are better advised to seek other forms of financial relief, rather than striping cash from their retirement plans. One reason is that under federal law, assets held in an employer’s retirement plan are excluded from the judgments for creditors during bankruptcy. Rather than spending down retirement assets, only to prolong the inevitable bankruptcy, it may be better to not touch these protected assets and get the bankruptcy process going sooner rather than later.

And since most states provide some exemption for your home, after bankruptcy you’ll still own that and your 401(k) account.

Also, low-income individuals (including those who suddenly find themselves unemployed) who face unexpected and large uninsured medical expenses may also qualify for a certain form of Medicaid benefits that consider primarily income. Pulling cash from retirement accounts in this situation may be unnecessary, and it may be better to get the Medicaid application process underway.

In both situations, your best move is to seek the counsel of a qualified attorney on the best course of action before you take a nickel from your 401(k) plan.


AnswerDash: Provide Predictive Answers Before Your Customers Even Ask Them

Think about the last time you visited the FAQ section on a website.

Why must the map on how to navigate the site be sequestered away from the site itself?

Users are often forced to leave whichever page they are looking at in order to track down information somewhere else on your website. And this puts all the burden on your customers, rather than on your website where it should be. Not only must customers leave the page they are looking at to find the information they want. They are often met with pages of gray print that take time to sift through.

AnswerDash has provided an answer to this predicament. The company has eliminated the use of ‘help islands’; or separate, standalone pages that are often slapped onto sites with little to no integration into the flow of the information . Rather than being redirected to a separate page, users are able to access a tab on the page itself and search from there.

This is the exact opposite of the standard help island formula. As AnswerDash representative Morgan Moretz said in an email interview with Small Business Trends, “AnswerDash is the next generation of website self-service that gives users the right answers, at the right place, at the right time.

“With AnswerDash, digging through knowledge base articles is avoided. Lengthy typing sessions back-and-forth in a live chat window, whether with a bot or a human, are avoided. Phone calls are avoided. Although this type of ‘in-context’ help has been a concept known to computer scientists for decades, AnswerDash is the first company ever to provide it as a SaaS-based answer layer that can grow over time as Web visitors ask new questions.”

AnswerDash also makes use of analytics, providing the site with data about which questions are asked most often. This data, in turn, provides insights into what is causing potential customers to unsubscribe, abandon carts, or just leave, so that the issues can be addressed and fixed. “Our data shows that 5 to 15 percent of customers on a website will use AnswerDash to get answers to their questions,” Moretz mentions, “That’s 50 to 150 times as much usage as most online businesses that rely on help islands to provide answers.”

According to AnswerDash’s own case study (PDF), its tool helps to reduce customer support volumes by up to 50 percent, which means customers are spending more time looking at your product, not an FAQ. Not only do they spend less time searching for answers, but they also spend less time contacting support phone lines, live chat options, or email. (These solutions can be costly or inconvenient for both parties anyway.) By simply accessing a small tab at the top of the page, users are able to access a list of questions and issues giving them information as quickly as possible.

Creating a streamlined system is critical to retaining customers on your site. When users encounter problems, they often become frustrated, and negative experiences do not bring about repeat customers. Instead, AnswerDash tried to design its system to minimize reliance on huge Q&A sections or frustrating  customer support.

Moretz says, “In recognition of most people’s desire to solve their own problems rather than contacting customer support, AnswerDash makes getting self-service answers easy — much easier than FAQs or other help islands. In fact, most customers never need to type a single word when getting answers with AnswerDash since it’s based on the power of point-and-click.

Image: AnswerDash


Be Sure to Scan Landing Pages Before Spending Money on Digital Advertising

landing gear

One of the sure fire ways to boost one’s online store sales is to advertise online. In fact, according to research by the search giant, Google, almost 88 percent of consumers search for the products they want to buy online.

With this in mind, small businesses have the opportunity to influence their target market through various paid advertising options in the form of search ads, blog postings pay-per-click advertising. As more and more companies compete for their target audience, up to $49.5 billion was spent for online ads by U.S. companies in 2014 according to Internet Ad Bureau.

For small businesses to effectively reach their target audience, setting up specific search ads with customized messaging will help achieve this goal. It also includes ensuring that the landing pages are properly setup prior to running the search ad campaigns to avoid spending on pages that will not convert. Here are the different types of landing pages to watch out for. Avoid these landing page mistakes when setting up your landing URLs.

“Out-of-Stock/Fully Booked” Pages

Check for product or sales pages that contain items or products that are currently out of stock. Paying to run a campaign that links to a product that is not available will not only waste ad budget but will potentially infuriate the target audience who may decide to click on the ad.

Outdated Sites

Running an ad linking to a themed (or outdated) campaign which may contain offers or promotions that are currently not available will not only scare away potential customers but will also consequently increase your site’s bounce rate.

Archived Pages

Spending your ad budget on links to archived pages that don’t have specific or relevant messaging to the search ad’s headline is a good way to loose your audience altogether.

Search Pages with No Results

Linking to pages that have no significant ranking or searches within your site is another way to waste money in your ad campaign.

In order to prevent these problems, small business marketers should carefully craft specific messaging and ideally segment these messages to specifically target specific demographics and match specific keyword searches.

Another way to avoid the common mistakes most people make when setting their ad campaigns and linking to relevant pages is to scan the landing pages for any possible broken links or outdated messages.

One company, BrainLabs, has created a browser script to scan Web pages and pause ad implementation when it finds any problems that might negate the effectiveness of your ads.

The script provides an overview of areas of the site that need fixing so campaigns with broken links or outdated information may be paused and resources may be focused on more relevant ones.

Daniel Gilbert, CEO of BrainLabs, explained that the script searches the code of a Web page seeking red flags like the words “out of stock” or “currently unavailable.”

Knowing the suitable and working landing pages on your site gives you the power to stop spending resources on the irrelevant pages an fix those problems while focusing your ad resources on campaigns that have a better chance of converting

Plane Landing Photo via Shutterstock


It is prudent to pay off the most expensive loans before investing

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I have a debt of around Rs.3 lakh on two of my credit cards, and I also pay equated monthly instalment (EMI) ofRs.15,000 towards my car loan. I am 41-years-old and earn around Rs.1 lakh a month. My monthly expenses areRs.75,000. What sort of a plan should I have so that I can first pay off my credit card debt and then work on buying a house in the next 5 years?

—Sanjiv Khatri

As you too realise, one should paying off the expensive loans first. And with credit card interest rates on outstanding amounts being one of the more expensive debts today, it is always prudent to repay credit cards at the earliest. This debt undoubtedly gets preference over investments.

You must pay the loan before you start investing.

With a surplus of income over expenses currently atRs.25,000, it is assumed that your expenses already cover the EMIs. You need to start repaying the maximum on your credit card loan.

Accordingly, this amount should be converted into an EMI of Rs.25,000 for the next 12-14 months. You may have to pay for 14 instead of 12 months because of the accumulated interest on your loan. Apart from this, if you have any extra amount in between, use it to repay the loan.

Second in line is your car loan. This also carries a high interest rate, though not as high as that of the credit cards. In some cases, car companies absorb a part of the loan cost, depending on the demand for a particular car. This is more like a marketing expense for them. Check if your car loan carries any pre-payment charge. If not, and the interest rate is higher than what you could earn in a reasonably secured asset, then consider repaying the loan.

Only after you have repaid your loans, especially the credit card loan, should you start investing for your house or any other investment goal.

You plan to get a house 5 years from now. Assuming that you devote one of those years to credit card repayment, there would still be around 4 years left to plan for the house.

Start with a monthly saving plan to create a cash-down fund for the property. In four years, you should be able to accumulate about Rs.12 lakh (Rs.25,000*12*4). Any increase in monthly savings over the next few years has not been considered; but it can add to the corpus. At an interest rate of 10%, the total corpus becomes Rs.14.8 lakh. The required amount depends on how much down payment you need for the house.

In the quest for earning more from the corpus, don’t get aggressive with your investments. Do consider equity exposure for your investment book, but its extent that should be based on your risk appetite. Also, as you have only a 4-year horizon, you cannot be aggressive with this investment. It can be built via a systematic investment plan (SIP).

Within your savings basket, don’t forget to start creating investment baskets for your other investment goals such as retirement, and also an emergency or contingency fund.