|
By Conrad Green
If you’re a Baby Boomer, you’re on the home stretch with at most, a couple of decades left in your working life. More than ever before, now is not the time to fumble the financial ball and endanger your future with devastating financial blunders. Here are some errors you should avoid.
Mortgage Mistakes A paddle, but no boat.
Buying a home or taking out equity with the wrong type of loan:
1) Variable interest-only loan. Not only are interest rates rising, but whatever principal you don’t pay now will have to be made up later, in the form of additional payments. Don’t fall for the realtor’s claim that you can do this because your earning power will increase later. Sometimes it doesn’t, and you could easily be under a burdensome mortgage.
2) Option Adjustable Rate Mortgage. This lets you start with low payments, possibly lower than the interest you owe. You end up with negative amortization, meaning that instead of your loan balance decreasing, it grows larger as the interest gets added to the balance. If this is your only choice, you may be better off renting.
Avoid taking a home equity line of credit (HELOC) to pay off credit cards. Credit card debt is unsecured, but a HELOC is secured by your home. If you miss HELOC payments, you could be forced to sell your home. Plus, if you don’t have the discipline to keep from running up your credit card balances back up again, you could easily end up in worse shape than ever.
Retirement Account Mistakes
1) Turning down free money. Many employers will match your retirement contributions up to a stated percentage. This is one of the few sources of truly free money there is, yet only twenty percent of employees who are offered the option take full advantage of it by maxing out their matched contributions.
2) Borrowing from your 401(k) or 403(b) retirement account. This has many pitfalls, including:
3) Double taxation. Contributions to your account are pre-tax, which means you’ll be taxed later, when you retire and withdraw funds. But if you borrow from the account, you’ll have to repay the loan with funds you’ve already paid tax on… double taxation.
Uncle Sam. If you change jobs or are laid off, your loan will have to be repaid within a few months. If you don’t have the funds to do that you'll face a ten percent penalty, plus ordinary income tax on the loan (unless you are at least 55 years old). Your retirement nest egg may be permanently depleted.
4) Not setting up a Roth IRA. Financial guru Suze Orman calls a Roth IRA a slam-dunk because, though a Roth IRA provides no tax break now, once you reach age 59 ½ the distributions are tax-free (assuming you’ve had the account for at least five years). This is a smart move because chances are, your tax rate will be higher at retirement. Plus, Roth IRAs are flexible. If you need the funds, there is no penalty to withdraw your contributions at any time (but the earnings must remain untouched until you reach 59 ½). Assuming you meet the income limits, you and your spouse can each contribute up to $4,000 annually ($5,000 in 2006 if you are at least 50). To be eligible, a single taxpayer must have a modified adjusted gross income (MAGI) of $95,000 or less and a couple filing married jointly must have MAGI of under $150,000. Above those MAGI limits, your ability to contribute phases out.
For more information about a Roth IRA, visit this IRS Web site.
IRS Publication 590 Read more about financial mistakes to avoid:
Suze Orman
| Comments () >> |
 |
|
EANNA 
