The financial world can be complicated and there is always more to learn. Not only is there a staggering amount of information, but the laws and regulations change regularly. Over the years, I've had thousands of conversations and email exchanges on various personal finance matters. I've included some of the misconceptions I've heard along the way. Beware of these. They can put your finances at risk.
“Our will and trust covers our retirement accounts.”
Setting up a will and trust is an important step in your financial journey. It's something most of us know we should do, but we don't always follow through. If you've done it, congratulations! But be careful. If you have retirement accounts you still need to update your beneficiaries. Wills and trusts need to be amended from time to time as our lives change. We get remarried, kids move out of the house, and the list goes on. Sadly, in some cases we lose a spouse and other loved ones. If you've changed the beneficiaries of your trust, you need change your retirement account beneficiaries too. Don't assume that your trust or will covers your retirement accounts. They don't.
“I can borrow from my IRA.”
Many people have heard that some 401(k) plans allow you to borrow money from yourself. It is known as a participant loan. However, this is specific to company 401(k) plans, not Individual Retirement Accounts (IRAs). While you can pull money out of an IRA, it isn't in the form of a loan. Doing so will result in taxes. If you're under 59 1/2, it results in extra penalties as well.
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The misconception may stem from what is referred to as the “60 day rule” for IRAs. This rule was established as a way to allow people to withdraw their funds from one IRA and roll them over to a new IRA without resulting in taxes and penalties. This had to occur within 60 days to be eligible. If you go past 60 days, you're out of luck. This is not a loan. In addition, it was never intended as a way to access IRA funds for anything other than a “rollover.”
“I can't invest enough for it to really make a difference.”
When the budget is tight or you're starting out at your first job, it can feel like there isn't enough left over to make investing worth it. However, most people are surprised to find out how a little amount invested over a long period of time can add up to a lot! If you can start investing $50 per month and achieve an average 4% annual return, after 20 years you would have $17,867. Now consider increasing that $50 per month by 8% each year. Can you guess what happens to the $17,867? It doubles! Small amounts can really add up so wherever you are, get started!
“Gold is a safe haven.”
This is a particular pet peeve of mine. It isn't that I'm against gold as an asset. I'm not pro or anti gold. It is simply a precious metal. While it is true that gold can increase in value during troubled financial times, that doesn't necessarily mean it is a “safe haven.” That gives the impression that it is low risk which is far from true. If you want safety or low risk, look to FDIC insured certificates of deposit or fixed annuities. The chart below shows the price of gold represented by the GLD (an exchange traded fund or ETF that tracks the movement of the price of gold). I don't know about you, but it looks like a bumpy ride to me. If you're going to invest in gold, fine. But don't think you're keeping your money safe. You're not.
Chart courtesy of Yahoo Finance
“Bonds are safe.”
While bonds tend to be less risky than stocks, declaring them safe is painting with a very broad brush. Not all bonds are created equal. Government bonds are backed by the full faith and credit of the United States. That simply means the likelihood of default is very low. But that isn't the same thing as loosing value. If you buy 10 year U.S. Treasury Notes now and interest rates rise, the value of those bonds would drop. Of course, if you hold them for 10 years, you would be made whole. What if you needed to sell them before 10 years? You would have to sell them at a discount.
Now consider an even riskier bet. High yield bonds are issued by companies with lower credit ratings (i.e. higher risk of default). High yield bonds are also commonly called Junk Bonds. These bonds payer high rates of interest but they can also fluctuate wildly in value. They are not for the faint of heart.
This is nowhere near a complete list. There are many more out there. Beware of these misconceptions and avoid putting your finances at risk.
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Your guide to 2020 tax rates, retirement contributions, and Social Security.