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What to consider before lending money to family and friends
When your best friend views your
nest egg as a source of start-up funds for his latest business venture, or your
nephew hits you up for a car loan, your first impulse may be to reach into your
bank account to help. But it's a fact that loans to family and friends often
end up straining both finances and relationships. As Shakespeare said,
"Loan oft loses both itself and friend." In other words, if you lend
money to friends, you often don't get paid back, and the friendship itself may
disintegrate.
It's best to consider a loan to
someone you love as an "arm's length" transaction. If you're
pondering such a loan, keep the following in mind:
* You can just say "no."
It's your money, after all. Do you really want to raid an emergency fund or dip
into your child's college account to finance a friend's business idea? Think
like a bank. It's reasonable to ask tough questions about the person's bank
accounts, potential sources of income, planned use of loan proceeds, and
spending habits before extending credit.
* Consider a gift. If you're
comfortable sharing your resources, you may want to provide a monetary gift
with no strings attached. In many cases, this is the best solution because
neither you nor your friend expect the money to be paid back. Unlike a loan, this
type of arrangement can forestall misunderstandings and hurt feelings later on.
Of course, you should not give money if doing so would unduly strain your own
finances.
* Formalize loans. If you decide to
lend more than a small amount to a friend or family member, it's generally best
to draft a written agreement. This can be as simple as filling out a promissory
note (available online or at office supply stores). Such forms spell out the
basic terms of the loan -- amount, interest rate, payback period -- and provide
some limited protection should you and the borrower end up in small claims
court. Another recent innovation is the use of direct lending (also called
social lending or peer-to-peer lending) websites to facilitate loans between
family and friends. For a fee, such sites can prepare loan documentation, send
payment reminders, issue regular reports, even facilitate electronic fund
transfers. If the loan involves a significant amount of money, check with your
attorney.
Remember: Many personal relationships
have been damaged when loans go awry. So proceed with caution.
Posted in tax
If you're not sure what the "saver's credit" is,
you're not alone. Members of the Senate Finance Committee believe many people
who are eligible to claim the credit are unaware of its existence.
Here's what you need to know:
*The saver's credit, also called the "retirement
savings contributions credit," is a tax break designed to encourage you to
make contributions to your traditional and Roth IRAs and certain other
qualified retirement plans -- including your 401(k).
*You apply the credit directly to your federal income tax
liability, including the alternative minimum tax. The credit is nonrefundable,
meaning you can use it to reduce your tax liability to zero, but no lower.
*The maximum credit is $1,000 ($2,000 if you're married
filing a joint return).
*You're eligible if you're not a full-time student or a
dependent, are over age 18, and your 2012 adjusted gross income is less than
the phase-out amount of $28,750 ($57,500 for married filing jointly). For 2013,
those phase-out amounts increase to $29,500 for singles and $59,000 for joint
filers.
Here's why it's a good deal: If you're eligible, you can
take the credit and still deduct your traditional IRA contribution, which gives
you the opportunity for double savings.
Additional rules might apply. For instance, the amount of
the credit may be reduced by certain distributions from your retirement plans.
To learn how you can obtain the maximum benefit, please give us a call.
Last Updated by Noel Dalmacio on 2013-01-30 12:10:54 PM