401-Krime: Step Away from that Retirement Account

I don’t know anyone who likes having heavy credit card debt. It hangs over consumers like a dark cloud affecting every spending decision they make and causing constant stress.

And it’s even worse if the credit card kicks in a high interest rate, which they commonly do. Consumers often end up paying between 19 and 29 percent interest on the balance. At those rates it can be difficult to ever pay it off.

It’s no wonder that some people consider tapping their retirement accounts—such as a 401(k), 403(b), IRA or similar version—to pay off their expensive credit cards.

To some it’s a logical decision: you’re thousands of dollars in debt, paying astronomical interest rates on the balance, barely able to make the minimum monthly payment and looking at carrying debt forever. Yet, there sits a retirement account with ample funds that could easily cover the credit card balance.

It’s tempting: use those retirement funds to pay off those credit cards and be done with them once and for all.

But it may be a mistake, and in many cases it doesn’t work.

Withdrawing money from your retirement account can be costly and paying off your debt may not actually reduce monthly payments by enough to solve the problem. As a result you could end up worse off for having used retirement funds and not solving the problem.

When you withdraw money from your retirement account you are losing much more than just the amount you take out. For one thing, by reducing the amount of that account you are losing valuable purchasing power and forfeiting all the interest that money would have earned over the years. That can be a substantial amount.

And if you withdraw before you are eligible (at age 59 ½ with some exceptions), you are likely to receive 30 percent less after penalties and taxes.

That’s right: be sure to consider the tax burden that early retirement fund withdrawal will incur. Unless you have a Roth IRA, regular income taxes will be assessed on all retirement fund withdrawals.

Of course, there may be some legitimate reasons and scenarios in which it is prudent to make early retirement fund withdrawals.

Often, for people who lose their job for various reasons, the retirement fund comes on the table as a consideration of living income. And in some cases, retirement funds may offer a loan option, such as for first-time homebuyers, in which you borrow from your fund (borrowing from yourself, in effect) and pay it back over time.

But because there is likely a heavy penalty, taking money out of your retirement fund should be considered a last resort, reserved for emergencies.

There are better solutions for people carrying high-interest credit card balances and they don’t involve bankruptcy, debt settlement or consolidation.

Of course every situation is different and no single debt solution applies to all consumers. But a good place to start is a consultation with a debt or credit counselor, of which there is a large variety available.

A reputable debt counselor can help you devise a realistic plan for paying off your credit card and other debt without resorting to dire measures, as well as assisting with a solid budget and savings strategies to avoid unnecessary debt in the future.

For advice and information on finding a credit counselor, you might check the Federal Trade Commission website, www.ftc.gov.

When seeking out debt or credit counseling, whenever possible try to find someone local or within your area so that you can meet in person. And be sure to shop around. In the world of debt counseling there are a lot of scams looking to prey on the vulnerable.

At the very least, be sure to consult with a debt counselor before touching that retirement account. With most debt counseling services—including PowerDownDebt—the first consultation is free.

Is a Timeshare the Right Fit for You?

Is a Timeshare Right for You?

by Frances Rahaim, Ph.D.aka "The Money Doctor"

It’s no wonder the timeshares industry has become one of the biggest tourism businesses in the world since the concept was invented in the mid-1960s.

A timeshare can provide an affordable, attractive, dependable vacation option for families and individuals looking for a home-away-from-home without spending a fortune.

Americans love their timeshares, and with thousands of resorts across the nation Americans account for more than half of timeshare owners worldwide.

A timeshare offers vacationers a guaranteed accommodation, which they can visit year after year without worrying about upkeep and maintenance. And depending on the type of timeshare, owners may be able to trade times and locations with others, to travel to new places. Also depending on the timeshare contract, owners may let their family members and friends use their unit.

But a timeshare is definitely not for everyone. For those who prefer variety in their getaways—i.e. a camping trip here, a road trip there, the occasional cruise—a timeshare may not be the smartest purchase.

There are two types of timeshare ownerships:

1.     A deeded timeshare ownership

2.     A “Right to Use” vacation interval option

A deeded ownership is the original timeshare model, and began in France around 1964. A deeded ownership is a purchase of real property, like buying a house, except that the use of that property is restricted to a certain time (typically one week), the same time each year. In the early 1970s, deeded timeshares exploded in the United States with resorts first opening in Hawaii then quickly moving to the mainland beginning in Florida.

In the mid-1970s, a company called Resort Condominiums International introduced the concept of “Right to Use” ownership, in which owners purchase the use of a vacation unit rather than the actual property. This allows owners a variety of locations and trade options with other owners.

Deeded timeshares are considered real property, subject to real estate tax. That is, you own a piece of property like a condominium for a fixed period each year. Vacation interval ownership is considered personal property, but there is no ownership of an actual piece of property—rather you are buying the right to use a prearranged condo unit for an agreed-upon period each year.

In buying either a deeded timeshare or a vacation interval option, beware of annual maintenance costs, which may be hiked every year, according to the Federal Trade Commission, at rates equal to or higher than inflation. Maintenance fees typically run more than $600 a year on average.

If you are considering buying a timeshare, here are a few things to be aware of:

·      Do not consider a timeshare purchase an investment. Some sales people may pitch it that way, but the truth is timeshares are not easy to sell and used units are usually sold for less than the purchase price. “Don’t assume you’ll recoup your purchase price for your timeshare,” warns the FTC, “especially if you owned it less than fives years and the location is less than well-known.”

·      Make sure you consider the total cost, including travel costs to and from your timeshare, annual maintenance fees, taxes, closing costs, broker commissions and finance charges. (If possible, try to avoid borrowing to buy a timeshare, especially at high rates offered by a resort or developer.)

·      Do not purchase under pressure. Unfortunately, many timeshare contracts are signed during high-pressure sales sessions required as part of a resort-financed vacation or hotel stay. Insist on a right to rescission in your purchase contract, at least for a period of time. Also, be sure to receive in writing any promises made by sales people.

·      Do not buy without first researching and visiting your condominium unit. Many sales pitches feature an appealing slideshow or video of the timeshare unit. Insist on seeing the unit before purchasing. Ask local real estate agents about the timeshare program or resort. Check with the attorney general, the Better Business Bureau or other consumer protection agencies for any complaints about the sellers.

·      Compare, compare, compare. As with any large purchase, be sure to contrast the unit you’re considering with other timeshares, and against the cost of renting a similar unit in the same location at the same time. It may be a less expensive, more flexible option.

For more information on timeshares, order the FTC’s publication Time and Time Again: Buying and Selling Timeshares and Vacation Plans. Contact the FTC with specific questions: Federal Trade Commission, 877-FTC-HELP or FTC.gov.

You may also contact the American Resort Development Association, 1201 15^th St. NW, Suite 400, Washington, D.C., 20005, 202-371-6700, www.ardaa.org.

Catch the Money Doctor every Wednesday morning on Bear Country 95.3 FM and Monday mornings on WHAI 98.3 FM locally for tips and information about money.