Saturday, November 15, 2014

Borrowing From Your 401(k) Can Have Tax Consequences

If you participate in a 401(k) plan at work, you’re probably planning for retirement. But if you need money before retirement, should you borrow from your 401(k)?

Whether that’s a good idea depends on your personal financial situation – and in the process of making the decision about lending money to yourself, you may have questions regarding the tax consequences.

For instance, though you probably know the initial borrowing has no federal income tax effect, you might be wondering whether the interest you pay will be deductible. In general, the answer is no. That’s true even when you use 401(k) loan proceeds for your home.

Ordinary loan repayments are not taxable events either. That is, you don’t have to pick up the interest you repay into your account as taxable income. And, though you’re increasing your 401(k) account with the principal portion of each payment, that amount is not considered a contribution. You can still make pre-tax contributions up to the annual limit ($17,500 for a traditional 401(k) during 2014, plus an additional $5,500 when you’re age 50 or older).

What if you default on the 401(k) loan? The balance of your loan is considered a distribution to you, and you’ll have to report it as ordinary income on your federal tax return. In addition, when you’re under age 59½, a 10% early-withdrawal penalty typically applies.

Borrowing from a 401(k) is an important financial decision, and it’s essential to review all of the tax and financial implications before you sign the loan documents. Contact us for any assistance you need.
Call us at (219) 769-3616 with your questions, or email them to

Don't Lose Your Financial Records in a Disaster

Every year there are natural disasters that remind us how easily we can lose essential tax and financial records. After a disaster, you’re more likely than ever to need certain records to file insurance claims or apply for loans.

It’s smart to take the time before a disaster to identify key records, make copies, and find a secure place to store them. Here are some suggestions to get you started.

You don’t need to copy every tax and financial record. Your banks, credit card companies, and investment brokerages will have records of your accounts and can probably supply details of recent transactions if needed. Your employer will have current payroll records, and IRA or 401(k) plan trustees will have details of your accounts.

Keep a master list of all account numbers, with a contact phone number for each. That will make it easier to recover information after a disaster. If you handle transactions online, include your user ID and passwords.

Keep copies documenting the purchase of your home or investment properties. Also keep records of expenses for remodels or other improvements that change your cost basis in the property.

Your broker should have details of your original investments in stocks or bonds, but copy details of any investments you purchased independently. That includes numbers of U.S. savings bonds that you own.  If you change investment firms, ensure that your new advisor has all cost basis information for your account.

Make sure your will and estate planning documents are stored safely, either at your lawyer’s office or in another secure place.

Keep copies of your last three years’ tax returns, even if your tax preparer has duplicates.  Copies of older returns along with supporting documents should be retained if you have carryforwards on your returns.  And finally, include a recent backup disk from your home computer.

The best place to store your records depends on a number of factors. A bank safe deposit box should protect against most disasters. Sometimes a fireproof home safe is sufficient. Wherever you decide to keep your records, take the time to prepare now.

Call us at (219) 769-3616 with your questions, or email them to

Regroup and Refocus to Save Taxes Before Year End

Cheer up tax procrastinators! November is not too late to regroup and refocus your tax planning efforts before year-end.

Start by examining your withholdings and estimated tax payments to make sure you are not heading toward a penalty. Remember to consider any life changes this year; a change in marital status, dependents, or job can put your withholdings out of whack. Are your gifts to charity or retirement plan contributions on track? If you’ve been putting these off, there may still be time to get back on schedule.

Once you know where you stand, there are several things you can do to refocus your tax-saving efforts. For one, zero in on your taxable portfolio. Taxpayers with capital gains this year should consider harvesting some capital losses to offset those gains. This is particularly important with the new Medicare surtax on net investment income, which is a tax of 3.8% on the lower of net investment income or excess modified adjusted gross income above $200,000 for singles and $250,000 for joint filers. Taxpayers with long-term appreciated stock might consider donating some to charity to score a tax deduction equal to the stock’s market value.

You can also help reduce taxable income by what you put into your portfolio. Tax-exempt municipal bonds pay interest that is excludable from taxable income and the Medicare surtax. Also be aware that many mutual funds pay their annual dividends in December, so before you purchase anything this time of the year, check to determine the impact on your taxes. Another strategy is to put some of your discretionary funds into your child’s education savings account or Section 529 account.

This time of the year it’s all about lowering taxable income and raising deductions. Taking some strategic steps now might pay big dividends come tax time.
Call us at (219) 769-3616 with your questions, or email them to