Today’s top story: Year-end tax tips from the experts. Also in the news: rescuing your 401(k), 2014 tax tables, and tips for combating financial holiday stress.
Year-End Tax Tips For 2013 From Tax Experts
These tips could make a big difference in your tax return.
Are You Doomed If Your 401(k) Has Bad Fund Choices?
Not if you’re aggressive.
2014 Tax Tables: What They Mean for Your Taxes
Getting ready to file.
7 Tips for Coping With Holiday Financial Stress
Combating holiday money woes.
Shopping for a Health Savings Account
Putting money aside for out-of-pocket medical expenses.
Reader Claudia asks how she can lock in her recent investment gains:
“Is there a way to protect the growth on a 401K? From your post, it doesn’t appear that there is. It appears that the initial investment along with any growth is left to the mercy of the economy, market, etc.”
You actually can “take some money off the table” by switching it to the lower-risk options in your account, such as stable value funds, short-term bond funds and money market funds. The problem is that you won’t get much if any growth on that money going forward. And most of us will need a lot of growth if we want to retire someday.
Everyone’s 401(k) got hammered in 2008-2009. The people who made the damage permanent, though, were the ones who bailed out of the stock market and missed the subsequent run-up.
Investing in the stock market is scary, but over the long run stocks outperform every other type of investment and give us the inflation-beating growth we’ll need to retire.
So rather than trying to time the market, which doesn’t work, consider putting your anxiety to good use by reviewing your asset allocation—your mix of stocks, bonds and cash—and see if it makes sense given your goals.
How do you know the right balance? Your HR department may have resources, or you can use an online resource such as Financial Engines or Jemstep to give you advice. Another option is to simply use the “lifestyle” or “target date” options your 401(k) probably offers. These funds do all the heavy lifting for you, allocating your money and rebalancing automatically so your portfolio doesn’t get too far out of whack.
Today’s top story: Choosing the best credit card. Also in the news: Financial predictions for 2014, financial resolutions for Millennials, and how to manage ballooning credit card debt.
Which credit card is the best?
Don’t get sucked in by perks you’ll never use.
3 Financial Predictions For 2014 That Will Be Good For Your Wallet
Credit scores are about to become more realistic.
Nine Financial Resolutions For Millennials
How to start 2014 off right.
Manage Ballooning Credit Card Debt
What to do when that 0% interest rate runs out.
A Little-Known Credit Card Perk That Can Save You Big
Disputing charges is much easier when you’ve used a credit card.
Today’s top story: Five things that won’t hurt your credit score. Also in the news: The Golden Rules of personal finance, which banking costs to avoid while shopping for the holidays, and why the holiday season might be the best time to purchase a new home. 
5 Things That Won’t Hurt Your Credit Score
You can no longer use your credit score as an excuse for not getting married.
The Golden Rules of Personal Finance
The answers to some of the most common personal finance questions.
5 Banking Costs to Avoid This Holiday Shopping Season
The banks don’t need any presents.
4 Reasons to Buy a House During the Holidays
Less competition during the holidays could save you money.
Will the Body Shop Cut You a Deal?
Car repairs don’t have to crash your wallet.
Remember those money books I recommended last week? I’m giving away one of them this week: Mary Hunt’s “The Smart Woman’s Guide to Planning for Retirement.”
This is a terrific book filled with practical suggestions and plenty of encouragement for people who aren’t sure how to make their retirement dreams come true.
To enter to win, leave a comment here on my blog (not my Facebook page).
Click on the tab above the post that says “comments.” Make sure to include your email address, which won’t show up with your comment, but I’ll be able to see it.
If you haven’t commented before, it may take a little while for your comment to show up since comments are moderated. But rest assured, it will.
The winners will be chosen at random Friday night. Over the weekend, please check your email (including your spam filter). If I don’t hear from a winner by noon Pacific time on Monday, his or her prize will be forfeited and I’ll pick another winner.
Also, check back here often for other giveaways.
The deadline to enter is midnight Pacific time on Friday. So–comment away!
A reader recently wondered what the average person could expect from Social Security, compared to the taxes we pay into the system.
Urban Institute has done the math, and recently released “Social Security and Medicare Taxes and Benefits Over a Lifetime: 2013 Update.” The institute figured out net present values of money paid in and paid out for various situations: single male and single female, one-earner family, two earner families. Spoiler alert: in most situations, people in the simulations pay more in Social Security taxes than they get back in benefits–but they get back vastly more Medicare benefits than they pay in taxes. Overall, benefits received exceed taxes paid. Here’s one example with a cogent comment from the Wall Street Journal:
Consider: A one-earner couple with a high wage ($71,700 in 2013 dollars) retiring in 2015 can expect lifetime Social Security benefits of $640,000. The same couple can expect to get $427,000 in lifetime Medicare benefits—while paying only $111,000 in Medicare taxes. The latter figures help illustrate how Medicare, in particular, is expected to strain future federal budgets.
The report, which you’ll find here, is interesting reading. Obviously, there are caveats. Nobody can know for sure what his or her Social Security “payout” will be, since a lot depends on longevity. And that brings me to the most important point: it’s really not about money in, money out.
Social Security isn’t an investment scheme. It’s insurance. (The formal name for what we know as Social Security is Old Age, Survivors, and Disability Insurance or OASDI). It’s insurance against poverty, against outliving your assets, against a downturn in the market at the wrong time that could leave you with too little money on which to live. You still should save and invest as much as you can on your own, but Social Security provides a safety net in case things don’t go as planned.
Dear Liz: I will be inheriting around $300,000 over the next year. My instincts are to pay down debt with this money. I have two homes and for practical reasons need to keep them. One home has a $260,000 mortgage balance at 5%. The other has a $130,000 mortgage at 4%. We have $35,000 in credit card balances. Some are telling us to invest. I think we should pay off all the credit cards and then pay down the larger mortgage by $100,000 or more. Am I on the right track?
Answer: Paying off your whopping credit card debt is a great idea. You need to figure out, though, what caused you to rack up so much debt and fix that problem. Otherwise, you’re likely to find yourself back in the hole.
Paying down a mortgage is a trickier proposition. Most people have better things to do with their money than prepay a low-rate, tax-deductible debt. Before they consider doing so, they should make sure they’re saving adequately for retirement, that all their other debt is paid off, that they have a substantial emergency fund of at least six months’ worth of expenses, and that they’re adequately insured with appropriate health, property, life and disability coverage. Those with children should think about funding a college savings plan.
If you’ve covered all these bases, then paying down and perhaps refinancing the larger mortgage makes sense.
Dear Liz: My 401(k) plan has grown exceptionally well this year. I think we all know that it can’t last. I just recently heard about self-directed IRAs. I was intrigued at the possibility of opening one by rolling over a portion of my 401(k) money directly. The problem is, my company’s 401(k) provider will not allow the direct rollover of funds. Is there an alternative means of withdrawing 401(k) funds without penalty and still get them into a self-directed IRA?
Answer: You can quit your job. Otherwise, withdrawals while you’re still employed with your company will trigger taxes and probably penalties.
Your premise for wanting to open a self-directed IRA is a bit misguided, in any case. Your 401(k) balance may occasionally drop because of fluctuations in your stock and bond markets, but over the long term you should see growth.
You may have been sold on the idea that self-directed IRAs would somehow be less risky. Some companies promote self-directed IRAs as a way to invest in real estate, precious metals or other investments not commonly available in 401(k) plans. The fees these companies charge as custodians for such accounts are usually much higher than what they could charge as traditional IRA custodians, so they have a pretty powerful incentive for talking you into transferring your money to them.
The problem is that you could wind up less diversified, and therefore in a riskier position, if you dump a lot of your retirement money into any alternative investment. It’s one thing for a wealthy investor to have a self-directed IRA that invests in mortgages or gold, assuming that he or she has plenty of money in more traditional investments. It’s quite another if all you have is your 401(k) and you’re putting much more than 10% into a single investment.
Also, there’s a lot less regulation and scrutiny with self-directed IRAs than with 401(k)s, which increases the possibility of fraud. (Southern California investors may remember First Pension Corp. of Irvine, a self-directed IRA administrator that turned out to be a Ponzi scheme.) So you’d need to pick your custodian, and your investments, carefully. You also would need to understand the IRS rules for such accounts, because certain investments — such as buying real estate or other property for your own use — aren’t allowed.
If you’re determined to diversify your investments in ways your current 401(k) doesn’t allow, you can open a regular IRA at any brokerage and select from a wider variety of investment options. Or you can look for a self-directed IRA option with low minimum investment requirements to start.
Today’s top story: Hidden taxes that can bust your budget. Also in the news: how to job hunt during the holidays, the fastest growing jobs in America, and how to make the most out of your year end charitable giving.
Hidden Taxes That Can Bust Your Budget
How to avoid being caught by surprise.
3 Holiday Job Hunting Tips
Turn a holiday party into a networking event.
7 fastest-growing jobs in America
Find out which jobs are in demand.
Make the most of charitable giving and tax breaks
Do your homework before donating.
6 ways to avoid a holiday spending hangover
3 key components: a plan, a budget, and some discipline.
Today’s top story: How driving could affect your credit. Also in the news: The five C’s of credit, what you shouldn’t do this Christmas, and what we can learn about personal finance from three holiday classics.
How Does Driving Affect Your Credit?
Unpaid tickets could wreck your credit score.
The 4 Judgments Every Lender Makes Based on Your Credit
Introducing the five C’s of credit.
Essential Personal Finance Lessons From Three Holiday Classics
Kevin McAllister, coupon king.
Ten financial don’ts this Christmas
Advice from the experts on what you shouldn’t do this Christmas.
Everything I’ve Learned About Personal Finance in 10 Sentences
Short and sweet advice.