MINORITY BUSINESS REPORT
I Borrowing From 401(k) Today Could Hurt Tomorrow
t
You need a new car, or you
; want to take a vacation, or your
; house needs a new roof. You esti
; mate that you have $2S,000 in your
; 401(k) plan, and your plan allows
! you to borrow some of this money.
Does this mean you have cash on
J hand for these expenses?
| Not really. If you have a gen
' uine financial emergency, it may be
necessary for you to tap these
; funds. Barring that, however, it
; probably would be wiser to main
r tain the assets in your 401 (k)
account for its original purpose:
' meeting your retirement needs.
While most 401 (k) plans do
? contain a provision which allows
participants to borrow from their
) account, a shortsighted view of
r retirement funding could impact
' your long-term retirement savings
potential.
{ Points to Consider
* Before borrowing from your
r 401(k) account, keep in mind that
(
\
if you leave your current company,
you must pay back the entire loan
or the Internal Revenue Service
will consider it a distribution. This
means you will have to pay income
taxes on the amount withdrawn, as
well as a 10 percent early with
drawal penalty tax if you are under
age 59 and a half.
Perhaps even more important is
what your loan will really cost you
in terms of your retirement sav
ings. As a hypothetical example,
assume that you are contributing
$200 a month to a 401(k) account,
which has a current value of
$25,000 and is earning a 10 percent
rate of return a year. If you do not
borrow and incur interest charges,
your 401(k) account has the poten
tial to be worth $56,620 after 5
years and $566,790 after 25 years,
based on the hypothetical contri
bution and return rates above.
However, if you do decide to
borrow $5,000 and repay it over 5
years at a loan rate of 8 percent,
your 401(k) account will be worth
only 545,341 after 5 years and
5484,136 after 25 years ? differ
ences of 511,279 and 582,654,
respectively. The following section
tells you why there are such signifi
cant variations.
Why Your Hypothetical Account
Value Falls
If You Take Out a Loan
First, your S25,000 account
balance drop to $20,000.
In addition, a smaller portion
of the $200 monthly contribution
will be used as regular 401 (k) con
tributions (assuming you continue
contributions) because you must
begin to repay the loan.
When you repay a loan from a
401(k) account, yp?*'pay it back
with after-tax dollars. Normal
salary-deferred contributions to a
401(k) account are made with pre
tax dollars. To pay back the loan
plus interest over 5 years will cost
you approximately $140 per month
in after-tax dollars, assuming a 28
percent tax bracket. This leaves
just $60 a month to contribute to
the 401(k) account. Clearly, this
slows the growth of your savings.
To get your savings back on track
after taking a loan, you will either
have to contribute more to your
401 (k) plan or seek greater invest
ment returns on your contribu
tions (a choice which may entail
more risk.
Consequently, many financial
planners agree that tapping into
your nest egg now can affect your
retirement savings later. Although
only you can decide whether your
purchase is worth the cost of side
tracking the growth of your retire
ment savings, you may wish to
consider how important the pur
chase is to you and to discuss other
financial alternatives with your
financial adviser before borrowing
from your 401 (k) account.
If you would like to learn more,
please write care of Michael J.
Robinson, Dean Witter Reynolds
Inc. 380 Knollwood St., Suite 500
Winston-Salem, NC 27103
This article does not constitute
tax advice. Investors should con
sult their tax advisers before mak
ing any tax-related investment
decisions. Information and data in
this article were obtained from
sources considered reliable. Their
accuracy or completeness is not
guaranteed and the giving of the
same is not to be deemed a solici
tation on Dean Witters part with
respect to the purchase or sale of
securities or commodities.
jCooperative Extension:
Sound financial health improves lives
GREENSBORO ? Informed
? financial planning is key to
! reduced stress and improved self
Jesteem, says a Cooperative
| Extension specialist.
? "When financial problems get
lout of control, the stress generat
|ed can destroy a person's family
? life and affect their work perfor
; mance," says Dr. Claudette Smith,
J a family resource management
jspecialist with the NC A&T
? Cooperative Extension Program.
I Fortunately, programs offered
jthrough the North Carolina
| Cooperative Extension System
lean help, and Smith points to the
[work of a local Cooperative
| Extension agent as an example.
? From the Forsyth County
ICooperative Extension Center,
| Deborah Womack, an Extension
;agent in family and consumer
?education, has been helping
I Forsyth County residents, ages 4
;to 90, with their budgeting needs
jfor the past IS years.
'? "People are often amazed how
planning and sticking to a budget
Jean stretch their incomes," said
?Womack. "It's often just a matter
!of tracing where the money goes
Jthat encourages people to stick
jwith a budget."
? For audiences ranging from
!the Forsyth County Detention
JCenter to local senior citizen cen
Jters, Womack conducts her bud
geting programs with two goals in
!mind: helping people budget to
Jmeet their daily needs, and show
ing them the importance of sav
ing.
! With these goals in mind,
J Womack's programs are conduct
;ed in three or four separate ses
sions of two hours each.
J The first session focuses on the
Jwise use of money. In this session,
?Womack uses handouts, examples
land posters to reinforce the con
Jcept of distinguishing between
Jneeds and wants. She alsorempha
' sizes the need to establish priori
Ities when making spending
Jdecisions.
"Whether their income results
i
Investment Notes
Miehaol J. Robinson
Wachovia promotes Peace |
Sharon P. Poato has boon elected operation* officer at Wothovia
Oparational Service* Corporation in Winston-Salem. She it docu
ment axominar tuparvitar in the Commercial Service* Group.
J
from employment, social security
or other government aid doesn't
matter," says Womack. "What's
important is making this money
cover basic life needs first, and
then looking at savings or unnec
essary purchases. And, because
situations are different for differ
ent audiences, I tailor my pro
grams around the needs of the
audience."
Since many of the participants
in Womack's programs have debt
problems, the second session of
the programs is devoted to estab
lishing or reestablishing credit.
Key to the concepts in the
credit session is the idea that debt,
when it occurs, should be manage
able.
"Many people amass outra
geous credit card bills without
even realizing that they're doing
it," said Womack. "Then, when
they find themselves unable to
keep up with the payments, they
borrow more money or get anoth
er credit card, creating a vicious
loop from which it is very difficult
to escape."
Womack teaches participants
in this situation how to cut back
on other expenses and focus on
reconciling outstanding debts. For
participants without this problem,
Womack feels that knowledge of
the pitfalls created by unmanage
able debt will make them less like
ly to make mistakes with credit.
Without proper education,
bank accounts can be confusing
and intimidating. For that reason,
Womack focuses the third session
on different types of bank
accounts and how to manage
them.
".Some people don't under
stand how to balance a check
book, or they don't realize the
importance of it," says Womack.
"If they don't know how mud)
money they have and where it is
going, they are going tp have a
more difficult time sticking to a
budget."
In the banking session,
Womack also explains the terms
and service charges of some bank
accounts, so her participants are
able to make informed decisions
when managing their money.
An optional fourth session
addresses rent-to-own issues.
"Sometimes when people see that
they have some discretionary
income, they go out and spend it
on something, and the rent-to
own offers are enticing," says
Womack, who structures this ses
sion around making informed
decisions by comparing prices and
payments between saving to buy
an item and renting it.
"I try to show that things can
change with learning," says
Womack. "What might be a large
problem now can be eliminated
over time with the right practices,
and when we feel more comfort
able with our finances, we feel bet
ter about ourselves and free of
some of life's pressures."
For more information, please
contact Dr. Claudette Smith, NC
A&T Cooperative Extension
Program, at (910) 334-7956.
"People are
often amazed
how planning
and sticking to
a budget can
stretch their
incomes,"
-Deborah Womack
I
1
Talent Bank a benefit
jto mid-year graduates
j This time of the year is gradu
ation time for many students in
(the college, university, or commu
nity college system. One of the
{best ways to get noticed is by
putting a resume on the Internet
Rising a service available through
the Employment Security
(Commission.
' Called North Carolina's
Talent Bank, this service allows
people to enter their resume
idirectly on the Internet. People
j:an put their name, telephone
number, education, skills, and
(work history directly in front of
Jaotential employers. What makes
jthe system unique is after the
resume is entered, verified
(employers can search those
(resumes and contact a job seeker
(directly without first going
(through a local ESC office.
( Since the service began in
^September, more than 400
employers and 1,460 job seekers
have signed on. North Carolina's
Talent Bank can be accessed on
the Internet at either
www.esc.state.nc.us or
www.atb.org.
For more information about
this story, contact Steve Nichols,
North Carolina Talent Bank
administrator, at (919) 733-7522.
Mutual Credit Union
/Vbere Your Dollars Make Mora Cants
"Your Community Credit Union"
??Savings Accounts
? wrect Deposit
? Christmas Club
? Personal Loans
? New and Used Cars
? Mortgage Loans
? CD's
Stop by or call TODAY!
1225 E. 5th Street Q0
724-9081 3
Tli?
WisttdUw
^ ?wtH?4
Call Far a Phonr Quatr
'Jmrn'-- IMW
IffWI
:2S?" 111.
77J'DD6U -
1414 Plaza South Dnva ?Karnaravllla, NC (Cornar Hwy 66 8.)
Special
Equity
line
Offer!
$5,000 to $24,999 Prime plus 1%
$25,000+ Prime plus 1/2%
Current prime rate at 8.5 APR
interest only, no closing costs
For more information, call
768-8500
^^South^rn
Cjommunity
BANK AND TIUST
Small Enough to Care
Visit our site at wwwscbtrust.com
4701 Counn dub Road Vinaon-Sdcm 76MSOO
(ai Ihe comer of Coutrv dub Road & Jonmowi Ro*d)
Equal Housing Opportunity Lender Member FDK
tpmd Muf/MMti
p7 BUSINESS BANK 7 N 7T J |
Sam Solomon, President
Bull Creek Corporation
Six families in
Franklin County had a
bold vision: they've turned
their tobacco fields into a
golf course. Before they
went to First Citizens for
financing, they had
completed a fourth of the
project themselves.
"We picked up rocks,
we cut bushes, we worked
on the tractors," explains
Sam Solomon, president of
Bull Creek Corporation
"We get out there and we
grab the shovel."
When loan officers
from First Citizens saw
first hand the sweat equity
the families had put into
their vision, they were
impressed. "First Citizens
was very receptive to us
when we went to them,"
says Solomon.
At First Citizens, we
believe that investing in
our community is good
business. For everyone. .
Call First Citizens at
' 1-888-FC DIRECT. We can
| make it happen.
_ FIRST
Citizens
Bank
http://www.firstcitizens.com/
Your financial resource. Just around the corner.
A Member FDIC