5
common mistakes in a bad economy | | |
| Taking cash out of a traditional IRA can lead
to a double-whammy of a 10-percent penalty and taxes of at least 25 percent if
the individual is younger than 59½, says Ira Marks, a Certified Financial Planner
based in Lawrenceville, N.J.
For example, a couple with a combined yearly income of $100,000
who withdrew $25,000 would pay a $2,500 penalty, plus a tax of $6,250 for a total
of $8,750, Marks says. State taxes would also be added. Taxes
and penalties would be more for a couple who earns more money. A couple who makes
$200,000 annually would pay $10,833 for the same $25,000 withdrawal, Marks says. There
are exceptions, such as if the withdrawal is made to pay for medical expenses,
he adds. Another caveat to note: If the money is replaced within
60 days, there will be no taxes or penalties -- good to know if you need a quick
infusion of cash for a college tuition payment before a commission check comes
in, for example. "But most people don't become aware of that
until they are working with their tax preparers the following year," Marks says.
By that time, the 60-day window to avoid losing money to taxes and the penalty
has closed. For a Roth IRA, a person younger than 59½ who withdraws
the earnings within the first five years of opening the account would pay the
10-percent penalty and taxes. There is no penalty or tax assessed when direct
contributions (not including rollover contributions) to a Roth IRA are withdrawn. Consumers
who may be leaving their jobs soon -- either voluntarily or not -- may want to
think twice before borrowing against a 401(k) plan. Once an employee leaves a
company, the loan turns into a taxable withdrawal, triggering the federal government's
10-percent penalty, Marks says.
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| What to do: invading your nest egg |
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| 3.
Paying for college without applying for aid
An Aug. 20 Sallie
Mae/Gallup survey found that one-fourth of families with children in college
did not send in the Free Application for Federal Student Aid, or FAFSA,
for the 2007-2008 school year. "It's probably the simplest
thing you can do to make sure you're not missing out on free money or low cost
money," says Patricia Nash Christel, a Sallie Mae spokeswoman. | 
