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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
It turns out you can go back after all - at least when it
comes to last year's decision to convert your traditional IRA to a Roth. The
question is, do you want to?
You might, if your circumstances have changed. For example,
say the value of the assets in your new Roth account is currently less than
when you made the conversion. Changing your mind could save tax dollars.
Recharacterizing your Roth conversion lets you go back in
time, as if the conversion never happened. You'll have to act soon, though,
because the window for undoing a 2012 Roth conversion closes October 15, 2013.
Before that date, you have the opportunity to undo all or
part of last year's conversion. After October 15, you can change your mind once
more and put the money back in a Roth. That might be a good choice when you're
recharacterizing because of a reduction in the value of the account. Just
remember you'll have to wait at least 30 days to convert again.
Give us a call for information on Roth recharacterization
rules. We'll help you figure out if going back is a good idea.
Last Updated by Tax on 2013-09-12 10:05:02 AM