Blog
Click here to go back
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 general
Here’s a tax question, I got from one of my clients:
If my kid works part-time, do you recommend funding a Roth IRA?
Hey, that is great question! And it deserves a great answer. Hello, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.
If you have a kid who works part-time, encourage your kid to fund a Roth IRA.
You might be thinking, what’s the big deal about a Roth IRA?
We’ll, it’s one of the most powerful retirement vehicle that you can take advantage of.
The contribution is not tax deductible, however, it grows tax-free and when you take out the money at age 60, it’s all tax-free!
What is the income requirement to fund it then?
You only need to have a W-2 or NET business income. Age is irrelevant.
So for 2015 and 2016, your kid can contribute the lesser of: (1) W-2/Net business income or (2) $5,500.
By funding this consistently, your kid can potentially accumulate quite a bit of money by retirement age. However, your kid might not be willing to put in the $5,500 even when they have enough earnings to do so. So just be satisfied if you can convince your child to contribute at least a meaningful amount each year. Remember, if you are so inclined, you can make the Roth IRA contribution for your child.
Here's what can happen if your 15-year-old kid contributes the following amounts:
(Note that it will be worth different values depending on the amounts contributed & annual return)
Annual Contribution Value when child is 60 years old
For 5 Years 3% 5%
$1K $ 28K $84K
$1.5K $ 40K $127K
$2.5K $ 67K $212K
Wow! You get the idea right? With just small annual contributions for five years, Roth IRAs can be worth eye-popping amounts by the time your kid approaches retirement age. That is the power of starting early!
If you like to learn more, click the link lowermytaxnow.com and sign-in to receive my weekly blog.
Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com
Last Updated by Admin on 2016-03-09 12:57:57 PM