Thinking about putting your tax refund into a retirement account? Read this first!

If you plan on having the IRS deposit your tax refund into one or more individual retirement accounts (IRAs), most of the hard part is already done: You’ve already decided that you want to save the money instead of spending it on new patio furniture or a trip to Jamaica.
Still, you’re not in the clear yet. Here are a handful of possible obstacles that might mess up your tax refund on its way through the direct deposit process:

• Wrong account number. If you accidentally use the wrong account number and it belongs to another customer, that mistake could take weeks or even months to correct. The IRS maintains that correct input of financial information on the tax return is the taxpayer’s responsibility, so make sure you check and recheck the account numbers you are using for your refund.
• Manual revisions. If the IRS gets your tax return and finds that the routing numbers have been manually revised, your direct deposit request has a higher chance of being rejected. You may get an old-fashioned refund check in the mail.
• Wrong type of account. It’s up to you to verify that your financial institution will accept direct deposits into an IRA. Some banks, for example, will reject direct deposits to anything other than a savings account.
• Refund adjustments. Sometimes the IRS corrects a taxpayer’s math or makes other adjustments that can affect the refund amount. In some cases, these adjustments may result in a direct deposit that exceeds the allowable IRA contribution amount. If so, you could be stuck with a penalty for excess contributions.

Putting your tax refund into an IRA can be a great idea, but remember: Double-check your return and be aware of the rules your bank or credit union has about IRA direct deposits.

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3 Reasons Why Your Child Should (or shouldn’t) Have Life Insurance

When determining whether or not to carry life insurance on your children, you’ll find that people have a variety of opinions. Here’s a look at some of the most common considerations for and against life insurance policies on children:

1. Financial security. Traditionally, you take out life insurance to provide for the financial security of dependents. The policy should include funds to replace the insured’s income and to pay off debts. Neither of these reasons applies to young children. They don’t generally have any significant income, and they don’t usually have any debts. Some parents might want to carry a modest amount of insurance to cover funeral costs for their children in case the unthinkable happens.
2. Insurability. Some people believe that by taking out a policy at a young age, it helps guarantee insurability as the child grows older. This could be important if the child develops a major illness later in life. The problem is that if the child does develop a serious illness, insurance will still become very expensive or limited.
3. Insurance as an investment. Some advisors suggest that parents should take out a whole life policy on their children. These policies include a savings component to build up cash value in the policy. You could then use that value for education expenses or other needs. But others say that there are cheaper and more efficient ways to save than by using life insurance. For example, putting money into a tax-advantaged 529 education savings plan is often a better way to save for school tuition costs.

Although a majority of advisors may argue against life insurance for children, there may be some situations where people find it makes sense. However, you shouldn’t take out a policy just because it is offered to you or because others are doing it. Make sure to do your homework and know exactly why you need the insurance.

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Emergency Funds: Why They’re Worth It

Emergency funds can be helpful for everyone. Any unexpected hit to your finances, and unanticipated illness or a natural disaster might all be reasons you may need money right away.

What is an emergency fund?

An emergency fund is designed to keep your life intact during temporary setbacks and to help you avoid unnecessary debt. That means things like car insurance premiums and regular home maintenance (and other anticipated bills) should not be considered emergencies. The same is true of credit card bills for vacations.

How much emergency savings is enough?

In general, your emergency fund should cover three to six months of expenses. How much you’ll need will vary based on your financial situation, including the vulnerability of your income.

For example, a one-earner household is more vulnerable than a two-earner household when it comes to paychecks. So the one-earner family should generally set aside more for emergencies. Or if you don’t have disability insurance, you might consider setting aside a bigger balance in an emergency account.

Check with your employer about benefits

Some companies provide payment for accrued vacation and/or sick leave to laid off employees. If your company provides such benefits and you maintain significant balances in these accounts, you may not need as much in an emergency fund (at least to help you weather an unexpected layoff).

Here are a few items to consider as you plan your emergency fund:

• Consider your ongoing debt payments. Putting excess cash toward high-interest credit card balances might make more sense than funding a savings account that earns four percent interest. The best option is to put money toward both your debt and your savings.
• Determine what can be reduced and postponed. These may be items like retirement plan contributions, vacations and entertainment. Ask yourself, “How much will I need to cover my minimum monthly expenses without resorting to credit cards or lines of credit?”
• Don’t wait to start saving. You can start small and increase contributions as you receive pay increases or windfalls. The money should be liquid — easy to get at — so don’t put it in investments with withdrawal penalties. A savings or money market account is a great place to set aside cash for a rainy day.

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Is Walking Away from Sunk Costs the Best Option?

Emotions make us human. They can also cause us to make rash decisions. Business owners and managers often let emotions dominate the decision-making process. This is especially true when choices are based on “sunk costs.”

Why sunk costs can lead to trouble

Broadly defined, sunk costs are past expenses that are irrelevant to current decisions. For example, many firms hire consultants who sell and install software. In some cases, a company is left waiting for years for a functional and error-free system. Meanwhile, costs continue to escalate. But are those costs relevant?

Managers, especially those who initially procured the software and contractor, may reason that pulling the plug on a failed contract would be wasting all the money spent. Not true. That money is “sunk.”

Other examples of sunk costs may be found in the areas of product research, advertising, inventory, equipment, investments and other types of business expenses. In each of these areas, companies spend money that can’t be recovered — dollars that become irrelevant for current decision-making.

 Sunk costs are a waste of time — move on

Truth be told, the only relevant costs are those that influence the company’s current and future operations. Throwing good money after bad won’t salvage a poor business investment — or a poor business decision.

Deciding to continue with a non-performing contract or a money-losing idea instead of staunching the flow of cash and changing course is irrational. It may be difficult to admit that a mistake was made. It may bruise the ego of the decision maker. But abandoning the sunk costs is often the wisest decision.

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