There’s a lot of good advice out there in the blogosphere, but it doesn’t mean you should take it!
We have to do our own due diligence to make sure that the advice we get is right for us.
So let’s take a look at five very common pieces of advice. You may be surprised that these seemingly good and positive things can leave you regretting your moves later.
Max Funding Your 401k
“You should be maxing out your 401k!”
Have you heard that before? That piece of advice is everywhere. Let me be clear – I am all for saving as much as you can for retirement.
But, the problem with max funding your 401k, is that you could create a potential tax-time bomb in retirement!
Of course, you get a nice current tax break when you throw money into your 401k now, but what I’m referring to is when you get into retirement, roll over your money to your IRA and take an IRA withdrawal. That’s where it gets interesting.
Every dollar you pull out will be taxable. Don’t assume too quickly that you’ll be in a lower income tax bracket in retirement. Rates are going up, and most generally folks want to maintain their standard of living, not decrease it. You might be in the same or higher bracket than you are now.
Converting Money to a Roth IRA
Why would you ever regret getting money into a tax-free position? Well, consider these questions:
- Do you have money to cover your tax liability? You don’t want to do the conversion and realize you have to use your IRA money to pay the taxes!
- Will the conversion push you into a higher tax bracket?
- Do you have non-deductible contributions in your IRA? Beware of some additional factors about non-deductible IRAs!
- Are you planning on applying for financial aid for yourself, your spouse or your child? Better think twice since it counts as income on your application!
Roth conversions sound like a great idea, and they may very well be, but jumping into it could cause big regret later!
Getting the Cheapest Insurance Coverage Possible
“Just get cheap term insurance and you’ll be fine” – “Don’t waste your money on insurance!”
I’ve heard those plenty of times. No one wants to be insurance poor. However, just because the insurance is cheap doesn’t mean it’s good! You have to look into a company’s ratings, how long they’ve been around and their “claims-paying-ability”.
It may be worth a few extra bucks a month to get insured with a solid company. If you’re unsure where to begin with life insurance, take a look at 4 Questions to Ask Before You Buy Life Insurance.
Buying Items with a “Same as Cash Offer”
So you borrow money at 0% to buy an item, and then pay it off before it’s due…you have essentially gotten a free loan!
It makes a TON of sense. We’ve probably all done it at some point.
Here’s where the regret may kick in:
You do enough of these and you start opening more and more credit, which negatively affects your credit score, which may negatively affect your ability to qualify for a loan when you really need it.
Think it can’t backfire? Think again. If you’re one of those who say, “No sweat! I’ll pay it off within 6 months and be fine”, you may be regretting your decision later. You never know what kind of situation may come up that leaves you unable to pay that bill.
If that happens, all of the interest that you thought you saved gets tacked on to the balance, and you’re now behind the proverbial 8-ball.
Saving for College in a 529 Plan
The 529 plan is now the most popular college savings plan in the marketplace. I love them.
But, here’s what you have to be careful with:
What if your son or daughter doesn’t go to college? What happens to all the money you saved for your dear child who now wants to start a rock band after high school?
Well, if you have younger children, you can change the beneficiary so that it goes to them. But, if you do not have someone you can change the beneficiary to, you’re out of luck!
You are stuck paying a 10 percent federal penalty on the earnings portion of any withdrawal not used for college expenses, and depending on the state, there may be penalties from them as well.
You will also pay income taxes on the earnings!!
So much for being a good parent and saving for that education you thought junior would love to have!
What Are Your Thoughts?
What else would you add to this list?
I wish I would have traveled more before I started working and bought more art even when it was a “little” outside my budget. Seems like those things are worth the investment. I’ve also heard friends of mine wish they had finished college in 4 years.
Very good points Jason. I especially like the same as cash one. The longer the period the more likely that other things may come up including many good sales that you are no longer in a position to take advantage of.
Indeed great points. I really like the bit about max funding your 401k. I HOPE that when I retire that I am in a higher tax bracket. However, just because I hope to be in that position later does not mean I am going to skimp out on saving a good bit now. I currently invest 12% of my salary with 4% match. Once I pay off some more debt, I hope to increase that to 15%….
Jason, I love this unconvential advice! I actually spend a lot of time debating which of these scenarios actually fits my own financial plan.
So many financial advisors give the broad advice, “max your 401k”, “convert to a roth”, “use a 529”, etc. It’s really refreshing hearing an objective viewpoint. You really must analyze what is appropriate for your own situation.
Fantastic stuff.
It would be real easy to write about the obvious benefits to all of the maneuvers.
It takes real thought to realize they might not be all their cracked up to be!
Thanks!
Good points. It can be easy to just rattle these bits of advice out without even considering an individual’s needs. That’s why it’s so important for people to become familiar with these topics – even if they still hire an adviser.