It is possible to make non-deductible contributions to an IRA, even if you have a qualified plan at work. Traditional IRAs are a good place to stash retirement money because of the tax treatment. Some people will choose to make contributions even when they are not deductible, which gives us two kinds of Traditional IRAs: deductible and non-deductible. Deductible IRAs provide a way to lower your taxes because you can deduct contributions to your IRA from your income. Nondeductible IRAs do not allow you to deduct your contributions, but they still retain their tax-deferred growth. Unlike a Roth, these after-tax contributions will be taxed upon withdrawal as income. Continue reading...
Distributions taken from a Roth during retirement are not subject any income taxes. Interestingly, the “cost basis” or contributions made to a Roth can be taken out at any time, including before age 59 ½, without tax or penalty. Contributions are recorded on IRS form 5498 and a copy is mailed to you, but you need to keep up with your contributions if you might want to tap into your Roth early. The earnings that accumulate must satisfy the 59 ½ requirement and the five year rule, or be used for first-time homebuyers expense, to avoid the 10% penalty and taxation. The five year rule says that the earnings in a Roth may be taxable if the Roth account is under 5 years old. Continue reading...
As with other retirement plans, this will mostly depend on the options available to you through your custodian. Solo 401(k)s will have an array of asset exposure available to you, but it may come only in the form of mutual funds. This is not unlike many larger 401(k)s. The way these plans are bundled as simple and straightforward products, without so many bells and whistles that they will attract the attention of the IRS, may cause them to be slightly more plain vanilla than the options available in some 401(k)s. Continue reading...
Traditional IRAs can get interesting if you or a spouse is covered by a qualified plan at work. You are able to deduct all of your contributions into a Traditional IRA as long as you (or your spouse) are not a participant in an employer-sponsored retirement program. If either of you are, there are certain regulations you should be aware of. The amount of your contribution that can be tax-deductible is determined by your (and your spouse’s) modified adjustable gross income (MAGI). Continue reading...
RMDs are withdrawals that are mandatory for an individual to take from an IRA or 401(k) after the person has reached 70 ½. The government created laws that help and encourage people to save for their retirement by deferring taxes on the growth on certain qualified retirement investment accounts. On Traditional IRAs and 401(k) accounts, they are only waiting to get the tax revenue from distributions/withdrawals that are fully taxable as income. Continue reading...
It is possible to withdraw money from an Individual Retirement Account without incurring a penalty, but it should be used as a last resort. If you withdraw the money before age 59½, you will pay both a 10% penalty and regular income taxes on the amount you withdraw from a Traditional IRA. However, there are special circumstances that allow you to make withdrawals without being charged the 10% penalty. These circumstances might include: paying for college expenses (whether for you, your grandchildren, etc.), paying for costs associated with a disability, medical expenses (must be greater than 7.5% of your adjusted gross income), and first-time home purchase. Continue reading...
There are some income limits and contribution limits on who can contribute to an IRA. Generally speaking, as long as you or your spouse is earning taxable income, you can contribute money to an IRA, be it a Roth or a Traditional IRA. There are limits at which you cannot contribute to a Roth IRA (in 2016, the limit is $132,000 for a single filer and $194,000 for a married couple). There are also income limits at which you are no longer able to deduct contributions to a Traditional IRA, but these are only applicable if you or your spouse has a qualified retirement plan at work. Continue reading...
It’s not likely that a cash-balance plan will allow for early withdrawals. Generally speaking, you can’t withdraw money from a Cash-Balance Plan before you retire unless it is to roll over assets to a new employer’s plan or a personal IRA. Once the money is in another account, you could potentially have full access to it, minus the 10% IRS penalty if you’re under 59 ½. Loans from a cash balance plan may be permitted if they abide by the same rules as 401(k) loans — and if the IRS and the DOL will allow you to consider your vested amount in your hypothetical account as adequate collateral. Continue reading...
SEP IRAs are subject to the same withdrawal rules as Traditional IRAs. SEP IRA contributions and earnings may be withdrawn at any time, but there are penalties that may apply, using the same rules as those applied to Traditional IRA withdrawals. If you are under the age of 59½, you must pay a 10% penalty fee in addition to income taxes on your withdrawal. Of course, there are certain exceptions to the penalties: first time home-buyers expenses up to $10,000, medical bills, educational expenses, and a few others. Continue reading...
In general, this won’t even be an option for many. Cash balance plans do not permit partial withdrawals. If you have separated from service at the employer, you can take your entire vested amount with you. You can cash out your balance and pay income taxes on it, as well as a 10% IRS penalty if you’re younger than 59 ½. This penalty may also be avoided if you separated a from service after age 55; these rules are the same for 401(k)s and other qualified plans. Continue reading...
Many people do not realize that their Social Security Benefits may be taxed. If you have a taxable income in retirement above a certain threshold, up to 85% of your social security benefits can be taxed. The calculation for the threshold income actually includes half of your social security benefits. Whether or not you trigger taxation on your benefits will depend on your “combined” income, which is a sum of your adjusted gross income (taxable income, which can include taxable sources such as qualified retirement plans), your nontaxable interest (from Muni bonds in particular, Roth IRAs are excludable), and half of your household Social Security benefits. Continue reading...
Cash Balance plans are Defined Benefit plans, but are not much like Pensions as you may know them, or other types of retirement plans, for that matter. On one side of the retirement isle you have defined contribution plans, such as 401(k)s and SEPs and so on, where the contributions are certain, or at least ascertainable, while the ending balance or benefit of each employee’s account is unknown, or at least does not have to be (and in most cases isn’t). Continue reading...
Withdrawal rules for Keoghs will be essentially the same as rules for IRAs and 401(k)s. Once you are age 59½, you may begin to make penalty-free withdrawals and only pay income taxes on the amount you withdraw, similar to a traditional IRA. If you decide to withdraw money before age 59½, you may have to pay a 10% penalty fee in addition to income taxes on the amount of your withdrawal. Of course, there are exceptions. One exception for most qualified plans is for employees who separate from service at or after age 55: this is the early retirement exception, and the 10% penalty will not apply. Keoghs will technically use the early withdrawal rules for 401(k)s and not IRAs, which differ slightly. Continue reading...
Generally this won’t be an option that your plan allows, but the IRS has approved it if the employer wants to. Generally speaking, you cannot. Hypothetically, if allowed in the plan document, and if the pension fund had enough of a surplus to handle such withdrawals, the IRS might find it permissible. The laws concerning such loans are the same for all qualified accounts, such as 401(k)s. An enrolled actuary would need to help you define when a loan might be allowable in particular deferred benefit plan. A Pension’s main goal is to pay out in retirement for the duration of the obligation, which may be your life and possibly the life of your spouse. Because of the massive liability they shoulder, pensions are inherently rigid and uncompromising when it comes to loans and withdrawals. Continue reading...
A SIMPLE IRA must be established by an employer with fewer than 100 employees. An employer can establish a SIMPLE IRA if they have no more than 100 employees who earned $5,000 or more during the preceding calendar year. The employer cannot have any other type of qualified retirement plan going while a SIMPLE IRA is in effect. SIMPLEs should be established between Jan 1 and October 1 of the first year of the plan, unless the business started after that. Plans can be set up relatively quickly and can even use automatic enrollment if employees are given the ability to opt-out. Continue reading...
Mutual funds come in many varieties, but here are some basics to keep in mind to help you find your way. While most people have definitely heard the term mutual fund, many people do not understand how they work and how to use them. With over 10,000 mutual funds available in the marketplace today, the average person may have a hard time selecting appropriate mutual funds for his or her portfolio, determining a good asset mix, and understanding all of the charges associated with buying, owning, and selling mutual funds. Continue reading...
SIMPLE IRAs have the same withdrawal rules as Traditional IRAs, with one notable exception. SIMPLE IRA contributions and earnings may be withdrawn at any time, but there are certain penalties that apply. If you are under the age of 59½, you must pay a 10% penalty fee in addition to income taxes on your withdrawal. If the early withdrawal occurs within two years of receiving your first employer contribution, the 10% penalty is increased to 25%. Continue reading...
Periodic distribution is a planned intermittent payment of cash from a 401(k). If you choose to have your money distributed periodically, you will usually have a choice between monthly, quarterly, or even annual payments. Money distributed periodically is not subject to the same 20% withholding the lump-sum payment is. The periodic payments are treated as wages, and, because plan participants taking these payments in retirement may find it easy to calculate what their income will be for the year, they can instead plan for their actual tax bracket, or opt-out of withholding if they prefer. Continue reading...
Withdrawals and loans can be taken out of a 401(k) before retirement, but the money may be subject to penalties, conditions, and taxes. It is quite common that 401(k) funds are needed before retirement, even though the IRS wants you to wait until you’re 59 ½, and will generally want to levy a 10% penalty on any premature withdrawals. Most plans allow employees to take non-taxed loans out on their balance, which may stunt the growth of the account which was intended for retirement, but if the funds are paid back on-schedule, as stipulated in the plan’s loan agreement, the employee can get back on track quickly. Continue reading...
The IRS requires IRA owners to take distributions starting at age 70 ½. By April 1st of the year following the year you turn 70 ½, the IRS needs to see a distribution from your IRA that satisfies the Required Minimum Distribution rule. The RMD is calculated using a table published by the IRS, and each age is assigned a different “factor.” The factor is a number, and you divide the balance of your IRA or 401(k) by that number to reveal the amount that will satisfy your RMD obligation. The factor decreases incrementally as the ages increase. Continue reading...