investing

5 common mistakes in a bad economy

"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.

What to do: investing your nest egg
  • Consult a tax preparer or financial planner before tapping into retirement plans in order to understand all of the associated costs.
  • In some cases, withdrawals from a traditional IRA can be subject to a federal 10-percent penalty and can be taxed. But an individual can avoid these costs if the withdrawal is paid back within 60 days.
  • Withdrawals from a Roth IRA can be subject to a 10-percent penalty, but no additional taxes.
  • Withdrawing from an IRA should be the last resort, because it diminishes money set aside for retirement. However, if faced with a catastrophe, such as foreclosure on a home, it may be a justifiable move.

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. Contributions can be withdrawn at any time tax and penalty-free.

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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3. Paying for college without applying for aid  
An Aug. 20 Sallie Mae/Gallup survey found that a 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.

The federal government uses the information on the form to determine an applicant's eligibility for Pell Grants, subsidized Stafford loans and other financial aid, she says. Private organizations often use the information when awarding scholarships.

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