I am shivering and have icicles for fingers today as I write this to you here in “balmy” (ha!) Palo Alto. I think we need to move back to Hawaii (where Kung Fu Guy is from) so that I can warm up! I just cranked up our heat and am about to start a fire in the fireplace if that doesn’t work…Hopefully I can keep my fingers moving on the keyboard until the heat kicks in!

It is definitely holiday season, with all of the business and craziness (and apparently freezing-temperature-ness!) that goes along with it. I am extra-excited because Kung Fu Grandma is arriving next week and will be staying with us for a month! Kung Fu Grandma is one of the most kick-ass people you will ever meet; I will definitely have to share her story with you one day. But for now, suffice it to say I cannot wait until she arrives!

One quick “housekeeping” item before I dive into this week’s questions:

  • I will be in your inbox all next week, but the following week (December 19 — 23) Kung Fu Finance will be celebrating some holiday family time. I will see you on the other side, on December 26th, and I hope you have a marvelous week!

OK, let’s jump into this week’s questions…I’ve got two short and two long ones for you!

Q: Carlos asks,

“So…how about the Kung Fu Girls’ best investments of 2011? And what about Kung Fu Girls’ picks for Best (and Worst) Investments of 2012.”

Great questions Carlos, and each is worthy of its own post so look for those both in your inbox before the end of the year…Thanks!

Q: Jarrod asks,

“Are you on twitter and if so what is your twitter handle?”

Yes I am, and my handle is “kungfufinance”…You can click this link to follow me, and I added a button on the website (thanks!).

Q.: Dan asks, Hello and Good Day,

I have a question about my 401K.  When if ever is a good time to cash out this worthless account and use it to help me get back on my feet?  My account lost about 80 percent of its value, and I am in a hole financially trying to pull myself out.  I understand all the penalties and tax payment requirements, but I feel that it is not doing me any good and could help right now.  Thank you in advance for any help.

Hi Dan! I so wish I could help you more, but unfortunately I am not licensed to give any personal / specific / individual advice. That decision is so dependent on your personal financial and tax situation that I really cannot advise you specifically. I’m sorry!

What I can tell you though, generally, is that if you have decided to cash it out, the best time to do it will be the year that you think you will incur the least tax penalty, because you will have to pay taxes on all of the money that you take out (plus the 10% penalty).

So depending on your personal tax situation, this could bump you up into the next tax bracket one year, which would cost you more money on ALL of your income that year, or it might not make much of a difference…it’s entirely dependent on your personal tax situation, so I would definitely advise you to talk to your accountant.

I’m so sorry I can’t help you more! On a positive note, if your account has lost 80% of its value then the 10% penalty (and tax hit) will be much less than were you to cash it out before (me, desperately looking for a silver lining for you…) but it is so dependent on you and your individual situation and needs that I can’t tell you what to do.

I will leave you with this though….Know Thyself, Grasshopper….only you will know if you are going to spend it on a fabulous Christmas / big-screen TV / trip / car / etc. or if you will invest it wisely in some vehicle that you cannot access through your 401k, use it to pay off ludicrous-interest credit card debt that you will never ever again incur, etc.

Good luck! I am definitely pulling for you no matter what you decide.

Q: Jodie asks,

Another quick Q. for you – You’ve mentioned you are an “accredited investor”…..and you’ll have to excuse my ignorance as I can only presume that this is a good thing for peeps that are doing well in investing, but what does someone have to do to call themselves this….?  AND why is it a “good thing?”

A: Hi Jodie, that’s a great question.

An “Accredited Investor” is a designation given by the SEC to someone who has a net worth of $1,000,000, not including his or her primary residence, or to someone whose income exceeds $200,000 individually or $300,000 with a spouse for the past two years and has a “reasonable expectation” of earning the same income in the current year.

(That’s the SEC definition for “natural persons”…they also have definitions for trusts, charitable organizations, etc., and you can read more about it here if you’re interested.)

Basically, as far as we human beings are concerned, it just means “a reasonably wealthy person”. (Although depending on where you live in the country, I can tell you that this could feel anywhere from “extremely wealthy” to “barely middle class”).

Technically Kung Fu Guy and I qualify on both tests, but to be honest I feel like an idiot saying “I am a millionaire!” (who cares?) and as I really want to help people focus on becoming better and smarter investors I prefer to say that I’m an accredited investor, because I feel that puts the focus on investing instead of on the quantity of money anyone has.

But here’s a dirty little secret for you…you’ll notice in the definition that there is really no mention of investing “prowess” or knowledge! You don’t have to take a test to become an accredited investor, or do anything at all other than “have” a lot of money.

I believe that the SEC reasons that if someone can earn and keep $1M net worth (without counting their home) or can earn upwards of $200,000 or $300,000 per year (or both) then that someone must have at least some level of financial intelligence.

But one look at many lottery winners, NBA athletes, Hollywood stars, etc. (remember the bankruptcies of MC Hammer, Kim Basinger, Gary Coleman, Don Johnson, and more?) tells anyone with half a brain that just because you “have” a lot of money doesn’t necessarily mean that you know what to do with it, how to keep it, or how to invest it.

Bankrupt Stars

Famous bankrupt stars...

However, until the SEC (or someone) comes up with a better definition and a true “investor test” it’s all we’ve got…

And the reason it is a “good thing” to be accredited is because many of the best investments are “reserved” for only those with “Accredited Investor” status. (Yes, that is totally unfair and ridiculous, but that’s the way it currently works, at least in the U.S.). For example, as an accredited investor I can participate in Private Placements, which can be very lucrative, and many other investments that aren’t open to the general public.

Great questions, and thank you so much for your nice feedback and comments! I’ll start to share some of those with you, too, in the coming weeks.

That’s it for today…thanks so much for reading and being a part of our community, and have a fabulous Friday and weekend!

To your financial success,

— Kung Fu Girl