Money Management Q&A

September 7, 2007

401(k) rules; purchasing bonds; buying pre-owned cars

New hardship rules for 401(k) plans

Last year my widowed mom bought a condominium and then lost her job unexpectedly. She hasn't found other work and soon may not be able to make the mortgage payments. If necessary, can I take a hardship withdrawal from my 401(k) plan to keep the bank from foreclosing on her home?

Possibly. Until recently such withdrawals were permitted only for hardships facing plan participants, their spouses, or their dependents, but last year's pension act extended that to include participants' primary beneficiaries. So even if your mother isn't your dependent, if you add her as a plan beneficiary you may be able to take the distribution penalty-tax free. Since the money would be necessary to prevent foreclosure on her home, the need would be considered immediate and heavy, which satisfies part one of the hardship definition. Part two is that she must not be able to get the funds elsewhere-by selling other assets, for example.

How many bonds do you need?

I have a sizable portfolio, stocks mostly, but after the mini market correction in March I want to add more bonds to it. If I go with individual issues, how many will I need to be diversified enough?

At least 10. At approximately $5,000 a pop, that means you'll have to commit $50,000 or more to the bond portion of your portfolio. The more bonds you have, the smaller the hit you'll take if an issuer stops paying you interest or defaults completely. To further protect yourself, choose different types of bonds, including corporates, municipals, and Treasuries, and get them from a variety of issuers. If safety is your top priority, also stick with bonds that earn the highest grades (A- to AAA) from rating services such as Moody's ( http://www.moodys.com) and Standard & Poor's ( http://www.standardandpoors.com). For more on municipal bonds in particular, see "Investing in munis: A smart move?".

Buying a used car that has a warranty

I need to buy a used car for my daughter, and a friend says I should consider certified pre-owned cars from local dealerships. That way if something's wrong with the car it'll be covered under warranty. How similar are these CPO programs?

They can vary significantly, so compare the details. First make sure that you'd get an extension of the manufacturer's original warranty rather than a service contract from a local dealer that requires you to go to that dealership for repairs, accept substitute parts rather than original equipment from the manufacturer, or make other compromises. Compare CPO programs from different automakers as well. Some warranties last longer or cover more parts of the car than others, and the additional perks offered (such as trip interruption benefits and financing options) differ from manufacturer to manufacturer as well. You can find out about CPO program specifics at each company's website, at http://www.edmunds.com (click on Certified Pre-Owned, then on How to Buy a Certified Pre-Owned Vehicle), or http://www.cars.com (click on Shopping Advice).

Send your money management questions to: MMQA Editor, Medical Economics, 123 Tice Blvd., Woodcliff Lake, NJ 07677-7664, or send an e-mail to memoney@advanstar.com (please include your regular postal address).