2009 Stimulus Package

A lot of people have been asking about 2009 stimulus money. As you recall most people received a check (or direct deposit) last summer as part of the Bush stimulus package. For 2009, you will not be seeing in that format. For working folks, stimulus money will be received through reduced payroll tax withholdings. For social security recipients, you should have received additional money ($250 in most cases) by now. So ... that's your 2009 stimulus money.

Retirement Money and Early Withdrawals

Hopefully, many of you have accumulated money in your pension and/or 401(k) plans. What happens to this money if/when you leave the company? If you are laid off, it will be tempting to cash out. However, it is important to understand that there will be very negative consequences for doing so.


The key consideration is that this money is supposed to be for your retirement. By taking the money out of a retirement account, you are depleting your nest egg. In addition, there are very negative tax consequences for cashing out prior to the age of 59 ½. First, the money that you take will be considered taxable income. That doesn’t necessarily seem so bad; however, this additional lump sum of income within one tax year could push you into a higher tax bracket. In addition, the additional income could cause you to lose certain tax credits that you would otherwise qualify for, such as earned income credit, child tax credit, etc. Making a withdrawal will also disqualify you from receiving the saver’s credit. In addition, the IRS will assess a 10% penalty for making an early withdrawal from a retirement plan. The overall impact of this can be devastating. Many people assume that they will not have a problem at tax time, because they asked their employer to take out the taxes at the time that they made the withdrawal. However, if you make that selection, your employer will only take 20%, while the impact on your tax return can be substantially higher than that. For example, I completed a tax return for a client who made a $1200 withdrawal from her 401(k) account. After assessing the impact due to additional income tax, lost credits, and penalties, the client incurred an additional $800 in taxes! Therefore, 67% of the withdrawal went to the IRS!

Check Your Credit Report

Periodically, you should check your credit report. The three big credit reporting agencies (Experian, Equifax, and Transunion) are required to give you information about what they have in your credit report once per year. They are not required to give you your credit score. However, checking the rest of the information in your file is helpful -- you should check it to make sure that the information is accurate and to make sure that no one has stolen your identity to get credit using your name and information. One way to maximize your ability to check your information more frequently is to pick one of the agencies, say Experian, and get your info. Then, four months later, try Equifax. Then four months later, try Transunion. This way, you won't have to wait a full year to potentially catch a problem. (Generally all three agencies have the same info, with slight variations). Generally, when you go to get your report, the agency will try to sell you your credit score, and other services. I say, save the money and just get the free report. Go to the following website to get started:

www.annualcreditreport.com

Filing Your Tax Return

If you pay someone to prepare your tax return, avoid taking out refund anticipation loan. A refund anticipation loan is where you get your tax refund very rapidly, usually within one to two days of filing. You are actually taking out a loan, with your tax refund from the IRS as the collateral. While it is nice to have your money quickly, the fees and interest make these loans a bad deal.

You will be better off making adjustments to your W-4 with your employer so that you get more money throughout the year. Obviously you will get a smaller refund, but you will have your money in your own hands sooner, without paying interest or fees. Go to www.irs.gov to make out a new W-4, which will adjust your federal withholding. You can also adjust your state withholding as well.

How To Pick A Bank

There are a lot of bank options, so don't get overwhelmed.

My suggestion is to find a bank with lots of ATMs in your area, or at least with ATMs that are convenient for you to access. Generally, your bank will not charge you for using its own ATM (but check to make sure before opening your account), but using another bank's ATM can be costly. First, the owner of the ATM will likely charge you a fee, and your home bank may charge a fee as well. The safest way to keep fees down is to make transactions at your home bank's ATMs.

Hopefully, you will have several good candidate banks to consider, with ATMs and/or branch offices that are convenient for you. Stop by these banks and ask for literature about their basic checking account options. The banks will probably offer special deals (i.e. lower fees, more benefits, etc) if you can maintain a certain minimum balance. If you don't think that you can maintain the minimum balance, that's okay. Even if the best account that you can find has a $10 per month fee, that is still better than $500 or so per year that you may be paying in check cashing and money order fees.

One other thing to consider -- based on where you live or work, you may be eligible to join a credit union. Credit unions are a good altermative to banks, often with lower fees.

Start getting your financial life in order ... if you don't have a bank account, get one opened right away. Arrange to have your paycheck directly deposited in your account, and you will immediately realize the conveniences of banking. Having a bank account will also help you get your tax refund more quickly and more securely ... but more on that in a future entry.

Open a Bank Account

One of the biggest surprises around is how many people don't have bank accounts. I'm not sure exactly why people don't use banks. Perhaps some people don't trust them. Other people perhaps owe the government money, and fear that the money will be taken from their bank accounts.

However, the penalties for NOT having a bank account are huge. Going to one of those check-cashing stores to cash checks gets expensive with fees that they charge. Then, paying to get money orders everytime you need to send off a check gets expensive as well. I have seen estimates that people without bank accounts end up spending $500+ per year in check-cashing and money order fees.

Opening a checking account offers many advantages. Some of those include:

1) Reduced fees

2) Security. Cashing a check and carrying around a lot of cash is risky. You can deposit your paycheck, and just draw out the amount of cash that you need.

3) Convenience. You can arrange to have direct deposit of paychecks. If you miss work on a payday due to sickness, your paycheck makes it into your bank account anyway. The ability to write checks when it is convenient for you, rather than having to make it to the store to get a money order is a huge help. Also, most banks will give you a debit card which you can use to make purchases, etc.


Coming soon ... How to pick a bank.