Loans

Yes, You Can Get a Personal Loan

July 11, 2019

By now, you’ve probably heard a lot about the “credit union difference” and how credit unions are better than banks (at least we think so!). But what does that mean to you, our members? Well, a heck of a lot when it comes to personal loans.

Consider making a credit union your first stop when shopping for a personal loan. Historically, credit unions like ours offer these benefits over banks:

  • Lower interest rates even if you have average or poor credit
  • Loan specialists willing to work with you and look at more than your credit score
  • More flexible terms

Credit unions will almost always have better loan rates than banks. That’s because we’re not-for-profit and member-owned. That means any profits we make go back to our members in the form of better rates and fewer fees. The lower the rate, the better the chance that you’ll be able to get a personal loan.

Oftentimes, getting the personal loan you need boils down to the relationship you already have with your financial institution – especially at a credit union. If you’ve been a long-term member in good standing, chances are the loan specialist will look at your whole financial picture, even overlooking an occasional credit blemish.

Types of Personal Loans

There’s more than one type of personal loan out there. There’s always the traditional secured personal loan, where you use some sort of collateral to get your loan. WWFCU offers these various types of personal loans as well:

  • Share Pledge Loan – This personal loan lets you use your savings as loan collateral for an extremely low interest rate. The only requirement is that your savings (shares) must be on deposit at WWFCU. There’s no waiting and no approval time needed when you apply.
  • First Chance Finance Loan – If you’re age 18 to 20, this loan lets young adults start building a solid payment history. We’ll loan you $500 after you’ve had your WWFCU account for at least ​60 days and have been employed for 60 days or more. No credit or cosigner needed.
  • Bounce-free Loans – If you have a negative account balance, this loan not only helps you turn that negative into a positive – it also gives you the chance to re-establish your good credit. Interest rates are based on your credit score. Check out all of the loan requirements here.
  • Credit Rebuilder Loan – If you’re looking for a little extra cash and want to boost your credit score at the same time, this loan ranges from $500 to $1,000 with a 12-month term. Requirements can be found here.

Whether you get a personal loan with us or somewhere else, just be aware that you have many options and to shop around for the best fit. To speak to a WWFCU loan specialist, call (734) 721-5700 or click here to apply for a loan today.

Credit Unions

A Brief History of Credit Unions

July 5, 2019

Since we’re celebrating the birth of our country this week, we thought we’d take some time to share the birth of the credit union movement with you.

Would you be surprised to know that credit unions first started in Germany? In the 1850s, two gentlemen opened the first credit unions. Cooperative pioneer Hermann Schulze-Delitzch created the first retailer-based, urban credit union. It served traders, shop owners and artisans.

Around the same time, Friedrich Wilhelm Raiffeisen founded the first rural credit union for ex-serfs who had smaller and less predictable incomes. By 1913, there were over two million credit union members in Germany. The movement soon spread throughout Europe including Belgium, Italy, France, England, Switzerland and British India.

The first credit union in North America started in Quebec in 1901 with just a 10¢ deposit. In the United States, St. Mary’s Bank of Manchester in New Hampshire was the first credit union. It was founded in 1908 to serve French-speaking immigrants who moved to New Hampshire from Canada.

The credit union movement got an additional boost from central banker Pierre Jay and Boston merchant and philanthropist Edward Filene. They helped establish legislation in 1908 which became known as the Massachusetts Credit Union Act of 1909. This served as a model for the Federal Credit Union Act of 1934, which was signed into U.S. legislation by President Franklin Roosevelt.

There are now currently over 5,600 credit unions in the United States serving more than 116 million members.

Loans

Should You Buy that Boat?

June 27, 2019

Now the warmer weather is here, so are the hopes and dreams of Michiganders wanting to buy a boat. But is buying a boat the right thing for you?

By now you’ve probably heard the saying that a boat is a hole in the water into which you throw money. Whether that’s true or not, it’s never stopped anyone from buying a boat! Before you decide to start throwing money at that hole in the water, here are some things to consider.

Can You Afford a Boat?

In many ways, buying a boat is similar to a car, but you need to look at it in a different light. While a car is a necessity to get you to work or chauffer your kids to school and various activities, a boat is a pure luxury. Do the math to see if the bottom line of a boat or the monthly payments make sense with your budget. If it does, then it’s time to figure out how much you should actually spend. Our loan calculatorcan help with this. 

The good news is boat loans typically have better rates and longer terms than auto loans, sometimes up to 15 years. Keep in mind, like other loans, your credit rating will be a factor. Speak to a WWFCU Member Service Specialistto find what loan terms work best for you. 

What Kind of Boat Do You Want?

It’s one thing to know you want a new or used boat, but what kind? To answer this question, you’ll need to ask yourself a few others. How do you plan on using the boat? Do you want to tow tubers or water skiers? Do you want enough space to entertain or sleep over? Or are you purely interested in fishing? Depending on how you answer these questions, you’ll have a much better idea what type of boat to buy: fishing boat, bowrider, pontoon, cabin cruiser or ski/wake boat.

What Are the Startup Costs?

Buying a boat means more than just paying for the sticker price of the boat. How are you going to transport it or store it? If you purchase a boat and trailer from the same store/person, you may be able to negotiate its cost. Do you need a dock and a hoist, a slip in a marina or a mooring?

There are other items you’ll need to have as a boat owner such as ropes, life jackets, paddles, signal flares, etc. Those are the basics you’ll need. Anything on top of that, decide that you’ll “treat” your boat to something new each summer such as tubes, water skis and more. 

What Else is Required?

When you buy a boat, you’ll need to insure it. At the very least you’ll need liability insurance and probably damage coverage – especially if you’re buying a newer boat. If you’re getting a loan, you may also need comprehensive coverage for your boat. 

Depending on your age, as a Michigan resident you may need to go through boater education and get a Boater Education Card. Learn more about boater education here.

Where Will You Store Your Boat Off-Season?

As a boat owner in Michigan, you’ll need to figure out where you’ll store the boat in the winter months. You’ll not only need to find somewhere to store it, but either winterize the engine and boat yourself or hire an expert to do it. 

How Much Will a Boat Cost?

Obviously, the price of a boat depends on many things. What type of boat? Is it new or used? We thought we’d give you a range of costs to give you a general idea of what you’ll be paying for a boat. For a new boat, plan on spending $20,000 on up. You can check prices using the NADA Guidefor used boats.  A boat trailer will cost about $2,000 to $5,000. If you need to get a mooring, expect to pay $3,000 or more. A boat lift/hoist will run you anywhere from $6,000 to $10,000. Insurance can range from a few hundred a month to over $1,000. Finally, expect to pay at least $2,000 a year for boat maintenance and cleaning. 

Time to Decide?

So, if none of the above has scared you off from buying a boat, then you’ll want to think about your timing. Before you head to the boat dealer, get prequalified from a lender (like us!). If you’re purchasing a used boat, you may want to hire an inspector to check it out. And remember whether you’re shopping for a new or used boat, you’ll also want to take it out for a test run if possible. 

Time to have a fun summer!

Business

The Financial Realities of Starting Your Own Business

June 20, 2019

Ready to take the leap from working for someone else to starting your own business? We have a rundown of some of the financial realities you’ll need to consider before diving in.

  • Start with a Business Plan
    If you don’t already have a business plan, you’ll need one before you start your business. A business plan outlines the first few years of your business. A good business plan not only helps you shape the concept for your business, it forces you to learn more about your industry. The Small Business Administration(SBA) can help you put together a plan, and it also has tons of great free resources you’ll need for every step of your business. Once you’ve got your business plan, you can use it to attract partners, investors, employees and more. 
  • Research Start-up Costs and Expenses
    The SBA estimates that the average cost of starting a business is about $30,000. However, costs vary greatly depending on your type of business and where it’s located. Regardless of what type of business you’re launching, you’ll need to consider the cost of creating and maintaining a website, your office/retail space, payroll, utilities, inventory, etc. Don’t forget, there could be various fees and permit costs as well as the possible expenses of licenses and insurance. Do the research for your state/city so you won’t experience any surprise costs along the way. 

  • Open Separate Accounts
    It may be tempting to just use your personal checking and savings account or credit card to start paying for business expenses – don’t do it! Open a business checking, savingsand credit card accounts in your business’ name. This will help come tax time and won’t muddy the waters when you’re launching your business. 
  • Don’t Skimp
    Whether it’s software or inventory for your company, get what you can afford without cutting any corners. Paying a little more up front to get the best software for your business, etc. could make the difference between success and failure. To save money, consider renting some equipment and furniture. Leasing items will also free up more money in the beginning when you need it most. 
  • Track Your Income and Expenses
    Sounds simple, right? Keeping track of the money coming in and going out can help you determine just how successful your business is and where to make some tweaks in the future. Start with a simple spreadsheet if you have to, just be thorough and diligent tracking everything. Once you have some experience and revenue under your belt, you can invest in a helpful accounting program for more extensive tracking. Many programs also help you with payroll, invoicing, equipment depreciation and more. 
  • Build Your Business’ Credit
    Business credit is just as important as personal creditwhen it comes to running a business. Just like you, your business can have its own credit report and score. Having good business credit can mean the difference between getting a business loanor not. Credit can be built through working with vendors that report your payments to business credit bureaus (just ask them if they do). Smartly using a business credit card can also help build credit.
  • Have a Business Emergency Fund
    We’ve talked extensively before about the need of having a personal emergency fundfor unexpected costs on the horizon. The same holds true for your business. Having a few months’ worth of income saved in a separate savings account can help you plan for off-season slumps or the inconsistent income that comes with owning your own business. 

Don’t be discouraged by all the financial realities and major decisions that come with starting your own business. The rewards of being an entrepreneur can far outweigh any negatives. 

Savings

5 Ways to Save for Summer Vacation

June 6, 2019

How many times have you vowed you were going to take a summer vacation only to not have the funds when the time comes? WWFCU thinks you deserve a vacation this summer, so we put together five tips to help you save for it:

  • Budget Trip
    The first important step to take is to figure out how much you need to save. Pick a location, how you’re getting there, where you’d like to stay, what you’d like to do when you’re there and where you’d like to eat. Get an idea of the cost of each, add it up and wham – you’ve got your budget! If the total is higher than you thought, you might want to think about downgrading transportation or accommodations. You may also want to find a cheaper way to eat while you’re away. 

    Once you have your more finalized total, count how many weeks you have from now till vacation and divide the total by the number of weeks. That’s how much you’ll need to save each week to make your dream vacation happen.
  • Separate Savings
    Now you know how much you need to save each week, you need a place to do it. Open up a new/separate savings account so you won’t be tempted to spend the money between now and your time off. If possible, set up an automatic deposit into the account with your employer or your financial institution. If you don’t see it, you won’t spend it! Having a separate account also make it simple to track how much you’ve saved and how far you need to go.
  • Cut Back
    Chances are you’ll need to cut back in a few areas to be able to afford saving to your vacation account. Instead of $5 for that mocha latte, make your own coffee at home. Instead of eating out, make more meals at home – including packing your lunch. Also, instead of going out to the movies, try checking out Netflix and making some microwave popcorn instead. Don’t feel like you’re depriving yourself too much, just remember it’s only temporary and for a very good cause!
  • Find Extra
    Another way to get extra money for your vacation is to earn it. This could mean scouring the house for items to sell on eBay or Craigslist. Another option is to get a second, part-time job to earn some additional funds. Even a few hours a week could make a difference. 
  • Keep Motivated
    A simple photo on your fridge or phone/computer wallpaper of your vacation destination may be all you need to keep on track with your savings goals. Take it a step further and involve your other senses. Thinking about a trip to Italy? A little pasta and Italian music might help to keep you motivated. 

If you get close to your vacation date and don’t have the funds you need, don’t despair. It may be time to pick a bigger and better destination for next year’s vacation. The money you’ve already saved can make a big dent in the overall savings goals for that trip instead. Just keep in mind, the earlier you start planning, the more you can save. 

Home Banking

What Can Mobile Banking Do for You?

May 28, 2019

The average American spends nearly four hours a day on their smartphone, and about a third of U.S. smartphone users use mobile banking or mobile banking apps. As a WWFCU member, you’re in luck! We offer both mobile banking and a mobile banking app. Whether you’re already familiar with our mobile banking or are new to it, we thought we’d break down how you can manage your WWFCU accounts using your smartphone.

WWFCU Mobile Banking

To take advantage of our mobile banking, you need to be enrolled in in WWFCU Home Banking. You can either sign up online or call a Member Service Specialist at (734) 721-5700. You must also be signed up for Online Bill Pay to be able to use that in mobile banking or the mobile app. 

Here’s a look at what our mobile banking and mobile app have to offer:

  Mobile Banking   Mobile App
View account balances X   X
Account balance quick view     X
View transactions X   X
Search transactions X    
Transfer funds between accounts X   X
Reorder checks X    
View digital images of cleared checks X    
Bill Pay – pay bills, add payees & view history X   X
Make loan payments X    
E-statements X    
Search account, credit card & tax statements X    
E-alerts X    
Graphs – view account income & expenses     X
View WWFCU messages X   X
View branch location, ATMs & CU Service Centers X   X
Contact Us – phone numbers X   X

Staying Safe

We take our members’ online security seriously. To learn more about how we keep your online accounts safe, you can check out our Privacy Policy. Our encryption technology keeps your accounts secure and protects your information. You can help keep your data safe by not using public Wi-Fi when mobile banking and to never open emails attachments or links you weren’t expecting. Finally, be sure to pick a complicated password for additional protection.

If you have any questions about mobile banking or our mobile app, stop by our branchor call (734) 721-5700 to speak to a Member Service Specialist.

Home Loans

Fixed Rate vs. Adjustable Rate Mortgages

May 16, 2019

From picking neighborhoods and school districts, to dealing with down payments and home inspections, there are a lot of choices homebuyers need to make. A major decision, one that will affect your finances for years, is what kind of mortgage to get: fixed or adjustable rate. 

The most popular type of mortgage is fixed-rate, which means it has the same interest rate for the life of the loan. That means your monthly payment (principal and interest) remains the same. An adjustable rate mortgage (ARM) comes with an interest rate that changes over time. It’s initially set below the market rate and then increases throughout the life of the loan. Each type of mortgage has its own pros and cons.

Fixed-Rate Mortgage – Pros and Cons

Pros

  • Borrowers are protected from sudden and major monthly payment increases if rates go up
  • You’re locked into your rate for the entire term of the loan (unless you refinance, that is)
  • It’s simpler to create and stick to a monthly budget if you know what your monthly payment will be

Cons

  • Your monthly payment will initially be higher than that of an ARM
  • If interest rates are high, it could be harder to qualify for a loan
  • It could possibly cost you more in interest over the life of the mortgage

Adjustable-Rate Mortgage – Pros and Cons

Pros

  • The interest rate and monthly payment are initially lower than those of a fixed-rate mortgage
  • Lower rates mean that you could potentially qualify for a larger loan
  • You could end up saving hundreds of dollars per month for the first several years of the mortgage

Cons

  • Your monthly payment may change often during the loan term
  • Monthly payments may end up being more than you can afford once they increase
  • ARMs are harder to understand compared to the more straightforward fixed-rate loan

Here’s a breakdown of the various mortgages, highlighting what they coast in the long run:

 

 

  Fixed Rate Mortgage Fully Amortizing ARM Interest-Only ARM
Loan Amount $200,000 $200,000 $200,000
Term 30 years 30 years 30 years
Interest Rate 4.5% APR 4% APR*  4% APR*
Initial Monthly Payment $1,013.37 $954.83 $666.67
Payment After 4 Years $1,013.37 $1,038.67 $791.67
Total Interest Paid $164,813.83 $261,906.43 $457,500.00
Total Payments $364,813.83 $461,906.43 $457,500.00
Ending Balance $0.00 $0.00 $200,000.00

*Rate is fixed for 12 months, then adjusts by 0.25% every 12 months to a maximum of 12%. The highest rate charged was 11.25%.

How to Decide?

There are a few factors to consider before deciding which type of mortgage is right for you. When choosing, ask yourself these questions: 

How much can you afford?

Once you’re prequalified for a mortgage, look at your monthly budget and determine what you can actually afford. Your bottom line may influence which mortgage you pick. You’ll also need to figure out what you can afford if your ARM rate increases. Start with the worst-case scenario and work your way back from there. 

How long do you plan on living in the home?

If you think you’re only going to be in the house for a few years, an ARM can help you save. If you plan on raising kids and growing old in your home, you should probably consider getting a fixed-rate loan.

What are the terms of the ARM?

ARMs come in all shapes and sizes, i.e. interest-only, fully amortizing, adjustment terms from one month to 10 years, etc. Know what you need and what your financial institution/credit union has to offer. 

What are the interest rates and where are they going?

If rates are currently high, an ARM makes total sense. Their lower initial rates will help you save in the beginning. If rates are low, a fixed-rate mortgage might make the most sense. 

After you’ve crunched some numbers, it’s always good to discuss your options with both an accountant and your mortgage lender to choose the mortgage that’s right for you. 

WWFCU teams up with Mortgage Center to give its members the best, most affordable options. Click here to apply for a mortgage or call 888-562-6865 to explore your options today.

Home Loans

Private Mortgage Insurance (PMI) Basics

May 14, 2019

Private Mortgage Insurance (PMI)

When purchasing a home, there are many different costs to factor into a budget. While many people are aware of expenses like taxes and the cost of making repairs, there are some costs that people don’tthink about, such as Private Mortgage Insurance (PMI). PMI is an additional monthly expense added to your mortgage payment when you make a smaller down payment on a home.

Why is PMI Required?

Private Mortgage Insurance is generally required by lenders when you are putting a low amount down on the home. When you put less money down on a home, the risk is higher, so lenders will require the insurance to protect themselves in case of a mortgage default.

Will PMI Ever Go Away?

With a conventional loan, PMI can be canceled when your equity rises above a certain percentage. Thishappens when mortgage payments are made or a home’s value appreciates.

If you’re eligible to cancel PMI, your lender will want to schedule an appraisal to ensure that you have enough equity.

With an FHA loan, you may be eligible to cancel PMI when you pay your mortgage down to a certain percentage of the original sales price. The market value of the home doesn’t matter.

If you’d like to know whether you can cancel your PMI, speak with your mortgage lender.

Can PMI Be Avoided?

There are different ways in which paying for PMI can be avoided. You may not have to pay PMI if you put a larger amount down on a home or, in some situations, are willing to pay a higher interest rate. There are also mortgage options that do not require PMI, like VA loans. Our partner, Mortgage Center, offers several mortgages including the PMI Saver, which allows you to avoid PMI with a smaller down payment.

If you have questions about PMI, including whether your PMI can be canceled, speak with yourmortgage lender. If you’d like to keep your mortgage with your credit union or are interested in the PMISaver mortgage, contact our partner, Mortgage Center, by calling 800.353.4449.

Information as of February 2019.

Mortgage Center is an Equal Housing Lender NMLS# 282701

Home Loans

Essential Tips for First-time Homebuyers

May 9, 2019

The thought of buying your first home can be thrilling – and intimidating. Whether you’ve just started the homebuying journey or you’re in the middle of the process, we’ve got some tips to help you along the way. These tips can be a refresher if this isn’t your first time house-hunting as well. 

  • Down Payment
    It may sound odd, but you need to start saving for a house down payment beforeyou start thinking about buying a house. Most experts recommend having a 20% down payment, but less is also okay. Just keep in mind, the more you have to put down, the less you’ll have to borrow. Plus, your monthly payments will be smaller. A smaller down payment may mean you’ll have to pay private mortgage insurance. 
  • Take Control of Your Finances
    Before thinking any further about mortgages, you’ll want to check your credit score. You’ll want to not only know your score, but look at your full report to see what may be negatively impacting your score. See any mistakes on your report? Now is the time to fix them. Contact the reporting agency to get errors put right. Also, put a halt on any big purchases. Those can have an impact on your credit as well. See what other factors may be affecting your score here.   
  • How Much Can You Afford?
    This is the big question, isn’t it? It sets the tone for the rest of your house-hunting experience. Speak with a mortgage specialist to get prequalified for a mortgage to determine how much you can afford. However, just because you’re qualified for a certain amount doesn’t mean that’s what you can really afford. Do the math to see what your monthly payments would bebefore looking at houses. 
  • House Hunting
    This is the fun yet stressful part! Be sure you work with an experienced buyer’s agent that knows the areas you’re interested in living. Once you start looking, remember life isn’t like HGTV. Houses may need work – it’s important to see beyond the clutter to see a home’s potential. You’re better off buying a home that needs a little cosmetic work and has a newer furnace, AC, hot water heater and roof. When searching, look for a home that will fit your future needs, not just your current ones. For example, you may have children in your future.  
  • Do Your House Homework
    Found the perfect home? Before you make an offer, check out the neighborhood. How are the schools? (This affects home value as well as your kids’ education.) What are the crime statistics? Drive through the neighborhood at different times of the day or days of the week to get a true impression of it. 
  • Making an Offer
    If you were smart and home shopped within your budget, making an offer should be a smooth process. Work with your Realtor to check out comparable homes that have sold nearby recently to ensure you come up with the right price. You don’t make an offer on a home based on what you can afford, you make it based on what it’s actually worth. It’s that simple. Be sure to make the home sale contingent upon a home inspection. This will help give you leverage when making the offer and avoid any surprises once you sign on the bottom line.   
  • Closing Costs
    You’ll want to factor closing costs into the overall number-crunching at the beginning of the house hunting process. Closing costs usually include a title search, title insurance, taxes, lender costs and some upfront housing expenses like homeowner’s insurance. Expect to pay about 2% to 5% of the purchase price of your home in closing costs. You can also ask the home seller to pay for some of the costs when negotiating the purchase price. 

Still have homebuying questions? Don’t worry, we have mortgage specialists that can help! Click here to see what home loan options WWFCU has to offer or speak to a specialist today.

Taxes

7 Smart Ways to Invest Your Tax Refund

May 2, 2019

You can maximize your tax refund in several ways — from paying off high-interest debt to investing in a business or saving for retirement. One or more of these options could be the perfect fit for you.

  • Pay Off High-Interest Debt
    Has a high-interest credit card balance been a thorn in your side? Resist temptation to book a vacation with your refund and tackle that debt instead. Start with debts with the highest interest rates; eliminating these will save you the most money in the long run. If you don’t have any credit card debt, use your tax refund to reduce your car or student loan debt.
  • Up Your 401(k) Contributions
    Put your tax refund toward everyday expenses, while increasing your 401(k) contributions. If you’re only putting in 3% of your paycheck, but your company matches up to 6%, you can double the pre-tax income you’re investing to maximize retirement funds.

    Your paychecks will be slightly lower but you can use your refund to make up the difference while investing in your retirement and lowering your taxable income.
  • Increase a Home Down Payment or Resale Value
    If you’ve been saving for a home, use your refund to increase your down payment to avoid costly private mortgage insurance payments and also to reduce the overall amount of your mortgage.

    If you already own your home and have been waiting to replace a leaky pipe or start a much-needed home improvement project, getting a tax refund might be a good time to make your home more functional while increasing its resale value.
  • Make an Investment
    Perhaps you want to invest in real estate, a tech start-up or a stock you believe is about to soar, but you’ve been waiting for a little extra cushion of cash. If you’ve done your research and are itching to take a calculated risk, utilize your tax refund before dipping into your checking or savings accounts.
  • Make Investments that Save Time and Money
    Dedicate part of your tax refund to a product or service that can save you time, money or a combination of the two. An example is finding a meal delivery service that’s cheaper than grocery shopping and can help make serving dinner quicker and easier on you during your busy workweek.
  • Open a Credit Card Account with Benefits
    As long as you’re debt free and pay off your credit card balances every month, you might want to invest in a card with desirable perks, especially if your current credit cards don’t offer any benefits.

    Some cards may require an annual fee, but they often offer substantial travel and lifestyle rewards. The right credit card should save you more than—or provide services that far exceed—the cost of maintaining the account.
  • Give a Tax-Free Annual Gift
    If you have a well-established financial portfolio and are near retirement age, you may want to consider gifting excess funds, such as a large refund, every year. The IRS sets an annual limit ($15,000 per recipient, as of 2018) on the gifts individuals are able to transfer to others, including family members, without filing a gift tax return.

    You are allowed to gift up to $15,000 to as many people as you want, though, as long as you haven’t exceeded the lifetime exclusion amount, which is $11.2 million as of 2018.

Courtesy: TurboTax

Investments Savings

Should You Touch Your 401(k)?

April 25, 2019

If you’ve taken saving for your future seriously, chances are you have a 401(k). In case you’re unfamiliar with the term, a 401(k) is a savings/investing plan from employers that gives you a tax break on any money you set aside for retirement.

Good savers can accumulate a tidy sum in these types of accounts, which can make it awfully tempting to spend. The pervading opinion of most financial advisors is … don’t do it! Here are a few reasons why touching your 401(k) is a bad idea:

  • A 10% Penalty Fee
    Unless you’re withdrawing money from your 401(k) for one of the reasons listed later in the article, you’ll have to pay a penalty of 10% on that withdrawal if you’re under age 59½.
  • Sooner Taxes
    If you make a 401(k) withdrawal before age 59½, you’ll also have to pay taxes on the amount you took out. Sure, you’d have to pay taxes on these withdrawals regardless on when you remove the money. But you’ll be paying taxes much sooner and you’re probably in a higher tax bracket than you’ll be when you retire.   
  • Future Wealth
    The interest you earn on your 401(k) is compound interest. Compound interest is what you earn on your savings, plus the interest that money earns. If you reduce the balance of your 401(k), you’ll be putting a dent in that compound interest as well. That means you’ll be earning less money in the future. 
  • Emergency Funding
    Many people don’t have an emergency fund and see their 401(k) as a replacement. Problems arise, however, when people dip into their 401(k) savings to pay for big ticket items like vacation or college. So, the money won’t be there if you really need it one day. 

Reasons You Can Use Your 401(k)

Speaking of emergencies, the IRS has outlined six ways you can tap into your 401(k) before age 59½ without penalties:

  1. Disability
    If something has occurred that causes you to be deemed disabled in the eyes of your insurance company or Social Security, you can withdraw from your 401(k). You’ll need a disability letter to make this happen.
  2. Medical Bills
    A major health emergency can get expensive. You can withdraw from your 401(k) to help with the medical bills as long as you take the money out the same year the medical bills occur. Keep in mind that the withdrawal amount can’t exceed 7.5% of your adjusted gross income. 
  3. Disaster
    Live in an area that’s been considered for disaster relief? You can use your 401(k) to pay for disaster-related expenses. 
  4. 55 and Laid Off
    Losing your job due to layoffs or buyouts means you might be able to withdraw from your 401(k) – if you were 55 the time it happened. The IRS puts it this way: “Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55.”
  5. Death
    Yeah, this is the most extreme reason a withdrawal can be made penalty-free from a 401(k). If you die, your family beneficiaries can use your retirement funds to cover burial expenses and supplement other income needs due to your death.   

It all boils down to this … Don’t use your 401(k) as a piggy bank and you’ll avoid penalty and have a happier retirement. 

The above article is for information purposes only and is not intended to be a source of professional advice. Consult your financial advisor and/or tax professional for official 401(k) advice.  

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