Investing in 2011

Written on Dec 12th, 2010

My #1 Investment for 2011

Market uncertainty. Interest rates at 1.5% if you can get such a good deal. Where should one invest their earnings? Are there any places? Precious metals? Collectables? Bonds? Commodities? Where?

None of the above.

Then what?

Your 401k!

Before you start running for the hills consider this. If your gross income using the current tax tables is $50,000 and you elect $2000 to your 401k you will realize a tax savings of $500 if you are married (and file jointly) and $300 if you are single. One your $2000 investment that is a gain of 25% and 15% respectively. Where else can you get a GUARANTEED rate of return that high? Nowhere!

Folks, this is real cold hard cash I am talking about. Most people do not realize that this is one of the greatest investments during any economic time as it automatically and immediatedly reduces the taxes that you are paying.

But, Eric. If I do that I lock in my money, principle and interest until I retire. So, maybe it is not a good idea after all.

First, I would say if you are not already saving for your retirement then you do not have your fiscal house in order. But, I hear this argument loud and clear and here is my reply.

You always have access to that money but it will end up costing you 35% (married), 25% (single) to pull your money for any of the following reasons if you are 59-1/2 or younger. This includes the tax break the Government gave you plus a 10% penalty for early withdrawal. Allowed withdrawels that include the 10% penalty are...

Unreimbursed medical expenses.
The purchase of a principal home.
Payment of college tuition and related educational costs
Payments necessary to prevent eviction from your home or foreclosure
major repairs to a primary residence
Funeral expenses

Further, you can take out money without any penalty other than having to pay the tax break Uncle Sam gave you under the following circumstances.

Debt for medical expenses that exceed 7.5 percent of your adjusted gross income
Court order to give money to your divorced spouse
Separated from employment (through permanent layoff, termination, quitting or taking early retirement) in the year you turned 55 or later
You become disabled.

This now should start to sound pretty good to you. But one more sweetener.

You can also borrow against your 401k. Up to 50% of its value. You have by law five years to pay the loan back. If you do so you do not incur the 10% penalty.

In any case. The point of the last discussion was to demonstrate to you that your money is not 100% tied up. A vast majority of Americans do not take advantage of their 401k. Not only does it save real $$$'s in taxes most employers match up to a certain percentage.

Get an immediate 15%-25% return on investment with capital preservation if you choose safe investments. And, you have access to the principle should hardship hit you. There is no better deal in town!

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