Paycheck Q&A

And why again, am I paying so much for gas?

Here's some answers about why gas prices have pushed past records nationally ($3.25 a gallon and rising) and near records locally in Columbia ($3.15 and rising).

The information comes from reports by The Houston Chronicle, The Associated Press and State Assistant Business Editor Andrew Shain, who compiled this entry:

We have enough gas, right?
Why, yes.
Crude supplies jumped by 6.2 million barrels the week of March 3, more than three times analysts’ forecasts, the government said. This was the eighth increase in crude supplies in nine weeks.
The government also reported that gasoline supplies rose by 1.7 million barrels the week of March 3, well above the expected 300,000 barrel increase. Supplies are up more than 10 percent since the beginning of the year, according to federal data.

Are we using less?
Apparently so.
Gasoline consumption fell 0.7 percent the week of March 3 compared to the same week last year.
Normally, gas consumption grows about 1.5 percent year-over-year, just to keep pace with population growth.

So why are gas prices rising?
Because much of the cost of gas comes from the cost of oil, which have just skyrocketed to levels few imagined even a year ago.
(And yes, there are other factors -- such as limited refinery capacity and taxes -- but gas doesn't rise 30-35 cents in a month because no U.S. refineries have been built since the 1970s or because S.C. and feds tack on an extra 35 cents a gallon.)

And why are oil prices rising?
The dollar has reached new lows against the euro, attracting new buyers to the oil market. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is weak. Many analysts believe the dollar’s decline is the reason crude futures have surged to new records during the past three weeks to hit $111. This is despite the fact that crude supplies have risen 10.2 percent since early January.

Will we see $4 gas?
Even the feds are admitting there's a chance -- in some places nationally.
The Energy Information Administration said last week “there is a significant possibility that prices during some shorter time period ... will cross the $4-per-gallon threshold.”
The EIA anticipates pump prices will peak at a monthly average of $3.50 a gallon sometime this spring as more motorists hot the road.
That would surpass the inflation-adjusted record of $3.40 a gallon set in March 1981.

Risks of raiding retirement accounts

So what are some of the investment and tax consequences if you borrow or withdraw from their 401(k) and other employer-sponsored retirement accounts accounts before age 59 1/2?

Here's a Q&A from The Associated Press:

Q. Do a lot of people tap their 401(k)s?

In recent years, about 18 percent of plan participants have taken loans against their ac-counts, according to studies by the Investment Company Institute and Employee Benefit Research Institute. The average unpaid balance at the end of 2006 was just under $7,300, the Washington, D.C.-based groups said.

Q. Is it such a bad idea?

“This should be the very last resort,” said David Wray, president of the ProfitSharing/401(k) Council of America in Chicago. “This is your long-term savings, and you interrupt both your savings and your earnings when you make withdrawals.”

Q. What are the penalties if I cash out the whole account?

The worst thing a consumer can do is cash out a 401(k). Be-cause these accounts are funded with pretax money, they become taxable when money is with-drawn. And if the worker is younger than 59 1/2, the amount of the withdrawal also can be subject to a 10 percent penalty. So if a worker is in a 25 percent federal tax bracket and is younger than 59 1/2, he or she could lose 35 percent of the money to taxes and penalties.

Q. So a loan is better?

Definitely. The way it works is that a consumer can borrow $50,000 or half of the vested balance in the account, whichever is lower, according to the ICI. The worker must pay the loan back, usually within five years, with interest generally set close to what a bank would charge, it said. Loans are generally paid with deductions from a worker’s pay-check. The worker can continue to contribute to the plan, though many find it necessary to cut back until the loan is repaid. If they cut back too much, they may miss out on some of an employer’s “matching” money. The worker also misses out on the earnings on the money that’s withdrawn. Further downside: If an employee defaults on the loan or leaves a job without paying it all back, the outstanding balance is taxable and the 10 percent penalty can apply, tax lawyers say.

Q. But what if it’s an emergency?

Generally if someone wants a hardship distribution, an employer first will ask the worker to take a loan for half of the account balance, Wray said. “The company is saying, ‘We’ll give you the whole thing ... but we’d like to protect you a bit if we can,” he said. Most companies limit emergency withdrawals to those categories approved by the Internal Revenue Service: medical expenses, purchase of a principal residence, to prevent foreclosure or eviction, repair of storm dam-age, payment of tuition, payment of funeral expenses. Employees will have to pay in-come taxes on the withdrawal and, in many cases, the 10 per-cent penalty also will apply. Further downside: Most plans bar employees from making 401(k) contributions for at least six months after a hardship distribution.

Q. If I’m young and I take a hit because of a loan or emergency withdrawal, I can make it all up in the long run, can’t I?

Sarah Holden, senior director for retirement and investor re-search at the ICI, said studies have found that “people who take early withdrawals tend to have smaller nest eggs at retirement.” This is especially true for lower-income families. she said. A study done by EBRI and the ICI found that lower-income workers who never took preretirement withdrawal from the 401(k) would have 13 percent more in retirement than those who did tap their savings, she said.

Play the grocery game

Another food-shopping saving tip after our story on grocery prices, this time from Maria Caldwell:

"I use the Web site www.thegrocerygame.com.

This site tracks the coupons from the Sunday inserts and store publications and matches them to what the store has on sale.

I save 40-50 percent a week off my grocery bill."

Note -- This is a pay service but does offer a four-week trial for $1.

Got a tip? Send them to ashain@thestate.com.

Also get more money-saving advice and news at our Stretching Your Paycheck page.

 

A helpful food-shopping hint

We asked for your input saving on grocery bills. Here's one from Kathy Hawkins of Columbia:

"My helpful hint on saving money at the grocery store is to limit the amount of frozen food items you buy.  Frozen entries tend to be expensive.

"Many of these items can be made at home for a more economical meal such as meat loaf, macaroni and cheese, and chicken casseroles.  All of these can be frozen for meal later. You'll save money on your grocery bill and they'll taste better."

Have  a tip to share? Send it to ashain@thestate.com

The 411 on the tax rebate checks

When will I get my tax refund check from the economic stimulus plan? And how much will I get?

Here's the skinny from an Associated Press report.

Q: Who gets a rebate?
A: Anyone who pays taxes or earns at least $3,000, including through Social Security or veterans' disability benefits. Singles with income of more than $75,000 and couples with more than $150,000 get only partial rebates.

Q: Who does not get a rebate?
A: People who earn less than $3,000, illegal immigrants, anyone who does not file a tax return, singles with incomes exceeding $87,000 and couples with incomes exceeding $174,000. The caps rise by $6,000 per child.

Q: What do you have to do to get the rebate?
A: Eligible people must file a 2007 tax return with a Social Security number for each person listed.

Q: How much is the rebate?
A: Single taxpayers get a rebate of at least $300, with couples receiving at least $600. The rebate will be equal to the taxes they paid, up to $600 for singles and $1,200 for couples, plus an additional $300 per child. That amount will be reduced by $50 for every $1,000 above the income limits of $75,000 for singles and $150,000 for couples. People who earn too little to pay taxes but at least $3,000, including elderly people whose only income is from Social Security and veterans who live on disability payments, will get $300 if single or $600 if a couple.

Q: How are the rebates calculated?
A: Rebates are calculated on the basis of taxpayers' 2007 adjusted gross income, which includes salaries and wages, interest, dividends, capital gains, taxable pensions, royalties and farm or rental income. It does not count contributions to individual retirement ac-counts, 401(k) retirement plans, tax-free health savings accounts or student loan interest payments. Rebates for low-income people who don't pay taxes, including the elderly and disabled veterans, will be a flat $300 if single and $600 for couples.

Q: When will the rebates arrive?
A: The Treasury Department says the IRS will begin sending out rebates in May.

Q: Will the rebates be deducted from taxpayers' regular tax refunds?
A: No, the rebates are on top of any tax refund.

Q: Where does the money come from?
A: The government will borrow the money to pay for the rebate, which is projected to cost about $117 billion over the next two years, adding to the federal deficit.

Steps you can take as the economy slips

What should you do to protect your money as the economy worsens?

Here's some advice from Cheryl Holland, a certified financial planner who is president of Abacus Planning Group in Columbia:

Save 10 percent of your salary

If you cannot save at this rate, try to save 1 percent more than you did last year.

For example, if you make $40,000 per year, try saving $50 per month in a savings ac-count, the next year save $100 and so on. It gets easier with practice.

Avoid borrowing money with credit cards

Credit cards are for emergencies not keeping up with the Jones' especially in times of economic uncertainty.

If you have credit card debt, understand the emotional reasons that you overspend and begin to develop healthy habits. Overspending is an addiction just like alcoholism or drug addiction.

It might be a smart time to purchase a home

Think about obtaining a 15-year fixed mortgage rather than an adjustable mortgage or 30 year mortgage.

The payments will be higher but it will build equity in your home. Never borrow more than 20% of your salary.

Your home will have additional costs such as property taxes, insurance, and broken sewer pipes. This approach will give you the flexibility to buy furniture, travel or save for your children's education.

Be patient

We have a vibrant, resilient economy which will continue to grow over the long run. Interim periods of slow growth are natural if not predictable.

Have a question for an expert? Send an e-mail to ashain@thestate.com

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Use the link in the upper right "About Paycheck Q&A" area to send us your inquiries about wages, medical expenses, insurance, wages, food, groceries, travel, shopping and other personal finance issues.