In more than eight decades of my life, I have experienced many down turns as well as positives enough to fill many essays and dreams. If there is anything I have learned over time, nothing lasts forever. In a flick of an eye, situations – good as well as bad – will change, and normalcy will reclaim our lives, and we will survive and be better for it.
Trying to compare our recent year of the covid 19 virus with past experiences can be difficult. The year 2020 has few comparisons unless you go back to 1917 and the Spanish Virus. Obviously, there are very few people who remember those dreadful days. In the over one hundred years since then, there have been many times when we have faced difficult disease outbreaks, and even wars, yet we have survived and found means to overcome adversity. The American Spirit prevails in the darkest of days. Our faith and country go hand in hand meeting the challenges and brushing aside negatives that try to lead astray.
The only comparison that I feel is realistic in my family goes back to the early and darkest days of early World War II. Families were split apart with fathers, brothers and other relatives being shipped far away; the print mediums and radio broadcasts highlighted negative news from various fronts, rationing of essentials such as gasoline and rubber prevented people traveling to visit family and friends. Mom found her pantry shelves void of the sugar and spices - many of the essentials necessary to bake the many holiday surprises we were fond of enjoying.
I remember how my sister and I felt as young children. Would there ever be another other Christmas like the ones we remembered from our limited past? We were separated from family and friends, even though our parents were tying hard to convince us that Santa Claus would still find us even hundreds of miles from our normal home. It compared to this year in many ways, and yet, we felt blessed that we were still free and able to communicate our lives and loves to those who meant so much to us.
Today, we are more fortunate to have many means of communicating instantly to those who are separated from us. With modern conveniences such as computers and cell phones, even though we may be apart, we come together instantly from any part of the country or world. In many cases photos are transmitted just as quickly as voice messages. We are being held together even though we are apart.
Yes, today is challenging, yet we know and believe we will overcome all that we are facing. It is in our minds and hearts to be strong and stay the course to a brighter more fulfilling future.
Another day…we’re moving on…
To address the challenges…others have come and gone.
We’ve adjusted to wearing a mask,
Though it is made more difficult to complete a task.
A burger and fries from a local drive thru,
Have replaced group gatherings we once knew.
Family and friends stay a distance apart,
When a nice hug and kiss would heal a heart.
Not having togetherness can be lonely,
But let’s not be caught saying…”if only.”
Let’s reach out to those we know…many or few,
With a call or note or even an e-mail will do.
Move on in positive ways,
To make these the best of our days.
A very Merry Christmas and a much Happier New Year 2021
Happy Holidays. If you are like many Americans, you’re wondering when to take retirement income… and how much. Well, for those of you old enough to remember layaway, this might just work for you. The “layaway” concept is also referred to as “laddering” by many. In other words, let some of the money continue to grow for a while, tap another part of the nest egg for a period of time and then release the balance in a retirement income flow. Let me give you a couple of examples.
Now, remember, each situation is different and you will want to confer with your financial professional. Here we go…
Let’s say we have a male ready to retire at age 66. He can take Social Security now, as he needs the money, but wants to maximize the value of his Social Security retirement income. Let’s also say that his Social Security retirement income is $2500 per month at age 66. He could leave that Social Security alone until he reaches age 70. That $2500 is guaranteed to grow at 8% per year with no current taxation. Very tough to beat today. But, remember, he needs $2500 per month now. What to do?
He could get a 4 or 5 year single premium immediate annuity for the period until he is 70 years old. Then, when that money is finished, he then takes Social Security which is much more than the $2500 at age 66. But, he has other moneys and will need more at age 75. So, he could purchase a fixed index annuity with a lifetime income rider to get the additional income he desires and take retirement income off of this account at age 75. Sound confusing? Let me help.
With this concept, your financial professional will only need to ask you two questions.
“How much do you need?” And, “when do you need it?”
He can give you the exact amount of money you need to put in “layaway” to achieve your retirement income needs. So, let’s empty that worry bucket. Holidays are approaching, and this is one worry we can eliminate.
With bank savings accounts earning pennies in interest, and even long-term certificate of deposit rates averaging less than one percent, it can cause a squeeze in the household finances. One result is some people go on yield safaris, looking for bigger interest game. While there is nothing wrong with trying for higher returns, the concern is that the potential for loss is sometimes overlooked.
A decade and a half ago auction rate securities and mortgage bond tranches were sold as low risk, liquid alternatives during a period when bank rates were falling. However, auction rate securities largely became illiquid and many of the “AAA” bonds were reclassified as junk or in default in 2008.
This time around some savers were buying packages of small business debt – but the impact of SARS-CoV-2 is causing small businesses to fail. Others are buying dividend paying stocks – often a sound move, but even companies like Ford creased their dividend in 2020. The more adventurous try covered call option writing, where you collect a fee for agreeing to sell a stock you own at a given price. It works well when the stock price is steady; however, all the option fees put together cannot overcome a big drop – like Exxon Mobil share price falling roughly in half in 2020.
If you’re a saver looking for a place that pays higher interest than the bank, but still protects your principal and the interest you’ve earned from market loss, the alternative is pretty much coming down to fixed annuities. Although a fixed annuity is not FDIC insured, fixed annuity carriers have an excellent record of protection in both good and bad financial times. There are two main types.
A fixed rate annuity pays a locked-in interest rate for a specified number of years – anywhere from one up to ten. A fixed index annuity pays interest based on the performance of an independent index, usually linked to the stock market. Which is better? It depends.
With a fixed rate annuity you know what you’re getting. With a fixed index annuity if the index goes down you won’t earn any interest for that year (but you won’t lose what you have). However, the fixed index annuity often offers the potential for considerably more interest, so if the good years offset the bad they could pay much more interest. It ultimately comes down to whether you’re okay with seeing a zero in a given year.
Fixed annuities have penalties for early withdrawal called surrender penalties. For fixed rate annuities with multiple year interest guarantees the penalty period usually matches the guarantee period. Fixed index annuity penalty periods are usually for five to ten years. The early penalties are much higher than those imposed on certificates of deposit – so you shouldn’t buy the annuity if you think you’ll need to cash it in early – but you need to look at the entire picture. If your choice is between a CD paying 0.75% and a fixed rate annuity paying 2.5% that has a 6% penalty, you are money ahead with the annuity after four years, even after cashing it in.
This is a very tough time for savers, and it doesn’t look like yields will be going up anytime soon. Even so, this isn’t the time to quit the bank and start hunting exotic yield beasts that could come back to bite you. It is a good time to consider moving some of that money to the protected sanctuary of fixed annuities.
For educational purposes only. Does not provide investment, tax or legal advice. Information believed accurate, but is not warranted. Not a solicitation to buy or sell any security. Past performance is not an indication of future results. Both investments and fixed annuities involve certain risks; a consumer should consult with their advisor. Fixed annuities are not bank instruments and are not insured by FDIC.
It goes without saying that most of us will be glad for 2020 to end, as it has been one of the most exhausting years in modern history. This past year is undeniably one for the history books on many fronts, including: human pandemics, the stock market, the economy, social impacts and politics. There is no doubt students and historians will be studying and analyzing 2020 for decades to come. Amazingly, despite the trials and tribulations 2020 has delivered, as of this writing, the markets are in positive territory for the year, despite being one of the most volatile markets in history. Below we review the events that caused this volatility.
2020 events that are statistically unlikely to reoccur in our lifetime…
S&P 500 (year to date)
Planning: Year-End Financial Planning Deadlines
As 2020 comes to an end, there may be a few items that need to be completed before the clock strikes midnight on December 31st.
Dream boldly. Plan wisely.
It's time to implement strategies to help reduce your 2020 federal income tax bill and position yourself for future tax savings. Here are some ideas to consider before year end.
Gaming the Standard Deduction
The Tax Cuts and Jobs Act (TCJA) almost doubled the standard deduction amounts. For 2020, the standard deduction allowances are:
The easiest itemizable expense to prepay is included in home mortgage payments due on January 1, 2021. Accelerating that payment into 2020 will give you 13 months' worth of itemized home mortgage interest deductions for this year. Beware: The TCJA limits these deductions, so consult with your tax advisor before prepaying your mortgage.
Other items to consider prepaying are state and local income and property taxes that are due early next year. Prepaying those bills before year end can decrease your 2020 federal income tax bill, because your total itemized deductions will be that much higher. However, the TCJA decreased the maximum amount you can deduct for state and local taxes to $10,000 ($5,000 for married couples who file separate returns).
Important: Prepaying state and local taxes can be a bad idea if you'll owe the alternative minimum tax (AMT) this year. That's because write-offs for state and local taxes are completely disallowed under the AMT rules. Therefore, prepaying those expenses may do little or no good for people who are subject to the AMT. Fortunately, the TCJA eased the AMT rules, so most people are no longer at risk.
To maximize your itemized deductions for 2020, you also could make bigger charitable donations this year and then make smaller donations next year to compensate. Or you might consider accelerating elective medical procedures, dental work and expenditures for vision care. If you itemize for 2020, you can deduct medical expenses to the extent they exceed 7.5% of your adjusted gross income (AGI). Next year, the deduction threshold is scheduled to rise to 10% of AGI.
Managing Gains and Losses in Taxable Investment Accounts
If you hold investments in taxable brokerage firm accounts, consider the tax advantage of selling appreciated securities that have been held for over 12 months. The federal income tax rate on long-term capital gains can be as high as 20%, plus the 3.8% net investment income tax (NIIT) can also apply at higher income levels. (See "Current Individual Federal Income Tax Rate Scene" at right.)
To the extent you have capital losses from earlier this year or capital loss carryovers from prior years, selling appreciated investments this year won't result in a tax hit. In particular, sheltering net short-term capital gains with capital losses is a tax-smart move because net short-terms gains would otherwise be taxed at higher ordinary income rate of up to 37%.
Conversely, if you have some loser investments — that are currently worth less than what you paid for them — you might want to unload them. Taking the resulting capital losses this year would allow you to shelter capital gains, including high-taxed short-term gains, from other sales this year.
If selling some loser investments would cause your 2020 capital losses to exceed your 2020 capital gains, the result would be a net capital loss for the year. It can be used to shelter up to $3,000 of 2020 income from salaries, bonuses, self-employment income, interest income and royalties ($1,500 for married couples who file separate returns). Any excess net capital loss can be carried forward indefinitely.
A capital loss carryover can be used to shelter short- and long-term gains recognized next year and beyond. This can give you extra investing flexibility in those years, because you won't have to hold appreciated securities for over a year to get a lower tax rate. You'll pay 0% to the extent you can shelter gains with your loss carryover. Depending on future tax rate changes, these loss carryovers can be quite valuable.
Donating to Charities
You can also make gifts to your favorite charities in conjunction with an overall revamping of your investments in taxable brokerage firm accounts. But there are two principles to keep in mind.
First, don't give away investments that are currently worth less than what you paid for them. Instead, sell the shares and book the resulting tax-saving capital loss. Then you can give the cash sales proceeds to favored charities — plus, if you itemize, you can claim the resulting tax-saving charitable write-offs.
The second principle applies to investments in appreciated securities. These winning investments should be donated directly to a preferred charity. Why? Because, if you itemize, donations of publicly traded shares that you've owned for over a year result in charitable deductions equal to the full current market value of the shares at the time of the gift. Plus, when you donate appreciated shares, you escape any capital gains taxes on those shares. Meanwhile, the tax-exempt charitable organization can sell the donated shares without owing federal taxes.
Gifting to Family Members
The principles for tax-smart gifts to charities also apply to gifts to relatives. That is, you should sell loser investments and collect the resulting tax-saving capital losses. Then give the cash sales proceeds to loved ones.
Likewise, you should give appreciated shares directly to relatives. In many cases, they'll pay a lower tax rate than you would if you sold the same shares.
Making Charitable Donations From Your IRA
IRA owners and beneficiaries who have reached age 70½ are permitted to make cash donations totaling up to $100,000 to IRS-approved public charities directly out of their IRAs. You don't owe income tax on these qualified charitable distributions (QCDs), but you also don't receive an itemized charitable contribution deduction.
The upside is that the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction without having to worry about restrictions that can delay itemized charitable write-offs. Contact your tax advisor if you want to hear about the benefits of QCDs. If you're interested in taking advantage of this strategy for 2020, you'll need to arrange with your IRA trustee for money to be paid out to one or more qualifying charities before year end.
Prepaying College Tuition Bills
The TCJA retains two valuable tax credits for higher education costs.
1. American Opportunity credit. This credit equals 100% of the first $2,000 of qualified postsecondary education expenses, plus 25% of the next $2,000 (assuming the phaseout rule explained later doesn't affect you). So, the maximum annual credit is $2,500.
For 2020, the American Opportunity credit is phased out (reduced or eliminated) if your modified adjusted gross income (MAGI) is between:
For 2020, the Lifetime Learning credit is phased out if your MAGI is between:
Specifically, you can claim a 2020 credit based on prepaying tuition for academic periods that begin in January through March of next year.
If your MAGI is too high to be eligible for the Lifetime Learning credit, you might still qualify to deduct up to $2,000 or $4,000 of college tuition costs for 2020. If so, consider prepaying tuition bills that aren't due until early 2021 if that would result in a bigger deduction this year. As with the credits, your 2020 tuition and fees deduction can be based on prepaying tuition for academic periods that begin in the first three months of 2021.
Important: The higher education tuition and fees deduction is scheduled to expire after 2020, unless Congress passes legislation to extend it.
Deferring Income Into Next Year — or Not
If you expect to be in the same or lower tax bracket next year, you might want to defer some taxable income from 2020 into 2021. For example, if you operate a small business that uses the cash method of accounting, you can postpone taxable income by waiting until late in the year to send out some invoices. That way, you won't receive payment for them until early 2021. Small business owners can also defer taxable income by accelerating some deductible business expenditures into this year.
Both moves will postpone taxable income from this year until next year when it might be taxed at lower rates. Deferring income can also be helpful if you're affected by unfavorable phase-out rules that reduce or eliminate various tax breaks, such as the child tax credit and the higher-education tax credits.
On the other hand, if you expect to be in a higher tax bracket in 2021, consider accelerating income into this year (if possible) and postponing deductible expenditures until 2021.
Converting an IRA to a Roth IRA
The best scenario for converting a traditional IRA into a Roth account is when you expect to be in the same or higher tax bracket during retirement. Currently, tax rates are low by historical standards, but there's been discussion of increasing taxes in the future to fund COVID-19 financial relief measures and various spending priorities. So, now might be a good time to consider a conversion.
Beware: There's a current tax cost for converting. A conversion is treated as a taxable liquidation of your traditional IRA followed by a nondeductible contribution to the new Roth account. If you wait to convert your account until 2021 or later, the tax cost could be higher, depending on future tax rates.
After the conversion, all the income and gains that accumulate in the Roth account, and all qualified withdrawals, will be federal-income-tax-free. In general, qualified withdrawals are those taken after:
Meet With a Tax Pro
The future of federal income taxes for individuals is uncertain. But at least you know the rules that will apply for 2020. Contact your tax advisor to discuss ways to best position yourself for this year and beyond.
Many people only think of an annuity as something that pays an income for as long as they live. This is one benefit all annuities – and only annuities – offer. It is also the reason why people buy immediate annuities (also called income annuities). However, the lion’s share of annuities are purchased as saving places and never turned into immediate annuities (the conversion is called annuitization). One of the reason annuities are used as saving places is that taxes on any interest earned may be deferred as long as the interest remains inside the annuity.
There are two main branches on the annuity tree:
Variable annuities are registered as securities and offer various investments. Since they are securities they are subject to stock market risk and can lose money. When you hear that annuities have fees, they are usually talking about variable annuities. Variable annuities can be annuitized and turned into a lifetime income stream, but the income will fluctuate depending on how the underlying investments perform.
Fixed annuities do not subject principal or interest earned to market risk – in others words, you can never lose what you’ve made because the stock market went down or some bond issuer went out of business. Fixed annuities can also be annuitized, but the income will remain stable and not go down.
Fixed Annuities as Saving Places
Annuities used as saving places are called deferred annuities, because, as mentioned, the annuity owner has control over when to take the interest out of the annuity and pay income taxes on it. All fixed deferred annuities guarantee a minimum return. The three types credit interest in different ways:
Fixed Rate Annuities declare a new interest rate each year. It will fluctuate, but will never be less than the minimum interest rate stated in the annuity.
Multi-Year Guaranteed Annuities (MYGAs) lock in a rate for the term selected of two to ten years.
Fixed Index Annuities base the amount of interest earned on the performance of an external index. Although the degree to which the annuity participates in any gains is locked in, the actual interest earned depends on well the index performs. Since this is a fixed annuity it does not lose any value if the index goes down, instead, zero new interest is earned for the period.
Fixed Annuities for Income
Immediate annuities pay an income for a specified period of years or for life. The biggest concern when getting an immediate annuity with a life income is dying too soon, with the result that the annuity company keeps most of the money. This can be offset by setting up the annuity to pay for the greater of life or a specified period of years (life with period certain). You can also choose a cash refund option that means payments will continue until all of the principal has been returned if early death occurs.
Withdrawals are another way to get income. The deferred annuity remains intact, but the annuityowner takes out the interest earned each year. Indeed, most deferred annuities allow the withdrawal of up to 10% of the value each year without penalties.
Guaranteed Lifetime Withdrawals Benefits (GLWBs) are withdrawals from the deferred annuity, but they are guaranteed to last a lifetime even if the annuity account goes to zero. The income is stable, but unlike an immediate annuity, here the annuityowner retains control over the remaining account balance. GLWBs are usually an optional benefit for which a fee is charged.
Annuities have similarities with other savings choices (and one difference):
IRS “Under Age 59½” Premature Distribution Penalty is in addition to the normal income taxes owing, and can be avoided if certain conditions are met. In the case of annuities not held in qualified plans, the penalty only affects withdrawn interest earned over and above the original principal.
Penalties for Early Withdrawal (surrender charges) are made if the annuity is cashed in prior to the end of the term initially agreed to. Surrender periods vary in length from one to twelve years. For the vast majority of policies, penalties do not apply if the policy is cashed in due to death of the owner. The annuity may be continued after the penalty period and no penalties are charged.
Maturity Date is the longest one can keep annuity interest deferred before it must be taken out. Maturity dates usually occur when the annuitant celebrates their 80th to 90th birthday, but some new policies may be kept until age 100 (the annuitant is the person upon which the annuitization life income is based – usually the owner). Although many financial writers get this confused, the maturity date is not how long the insurance company makes you keep your annuity with them, but how long the insurer will let you keep your money with them.
For educational purposes only. It does not provide investment, tax or legal advice. Information believed accurate, but is not warranted. Past performance is not an indication of future results. Both investments and fixed annuities involve certain risks; a consumer should consult with their advisor.
Fixed annuities are not bank instruments and are not insured by FDIC.
This November, you will be voting “red or blue” in the Presidential election. The most of important thing, of course, is that you vote. I don’t want to sound like a broken record and say that these are not normal times. But, what if they are for a while. Many years ago, I attended a conference where they spoke of the “circle of concern and the circle of influence.” The circle of concern is much larger. And, they are items that we usually don’t have any control or an ability to influence, these items. Sure, they keep us up at night but beyond our control. Examples could be a hurricane, tornado, COVID-19 etc. On the other hand, the “circle of influence” is comprised of items that we can influence and change... or, at least protect ourselves from. Let me explain.
My title of this article is “Red or Blue… but not Black AND blue.” Yes, you can affect change through your vote. But, how do you protect your nest eggs from getting “Black and Blue?” I am referring to some very volatile times in the equity markets. Please allow me to state that I am not giving investment advice. As you know from my previous writings, that I am and always have been a big fan of the equity markets. So, I am speaking to Baby Boomers and above. Do you have the appropriate amount of money at risk? Can you afford another potential downturn in the market? Do you have the “stomach” for a 10%, 15%, 20% or more drop in the market? Now, I can’t control the market… it is in my circle of concern. But, I can influence the outcome by making sure I have the proper amount of my nest egg in Safe Money Places.
So, in closing, make sure you vote… red or blue. But, don’t let your nest egg get “Black AND Blue.” You can influence that. If you would like to discuss options with a licensed agent in your state, give us a call and we will set up the appointment. Or, contact a member of the Safe Money Places Agent Network. Stay safe.
I don’t think that I need to say that these are not ordinary times. This pandemic is (I hope) a once in a lifetime occurrence. I, like you, have witnessed many events that we could not avoid. One only has to remember 9/11, the dot com crash in 2000, and the financial meltdown in 2008/2009. But, this COVID-19 experience may top the charts. While I am confident that we will get through this pandemic, there will still be carnage. Today, I am speaking about retirement income nest eggs for current, or soon to be, retirees. I would also like to remind you that I am not giving investment advice . I do believe in the equity markets, I do understand that long term markets have always come back. But, for many of us, there might not be time to build those accounts to the numbers we had imagined. That is why I am speaking of a retirement income vaccine.
Okay, let’s get the genie out of the bottle. I am speaking about annuities that can provide a steady stream of guaranteed retirement income. I am not here to argue about whether equities or annuities are best. I am also not here to suggest that you empty your “equity bucket” and place all your money in an annuity. But, I am suggesting that you empty some of your “worry buckets.” If you are like me, you look forward to a steady stream of retirement income that is guaranteed and one that you can’t outlive. So, I have some suggestions.
First, identify what is keeping you up at night. Next, look at a timeline and identify the date that you will need the retirement income. Separate essential from discretionary income needs. Then, ask yourself if you have the appropriate amount of money at risk. Then, make a decision. Is it time to place some of your nest egg in a product that will guarantee principal and all previous gains? Yes, in some products there are penalties for early withdrawals, but as long as you play by the rules… all will be safe. Some of these products will allow you to take income immediately, and some you can defer payments. Yes, these are annuities. I suggest that it could just be the vaccine that your retirement income account needs. Stay safe, do your homework… but do investigate an annuity. No, I am not giving investment advice. I’m just giving you an additional tool to help you sleep at night.
Family reunions and gatherings are a great way to stay in touch with the people we love. Unfortunately, the current state of COVID-19 and the lurking possibility of a second or third wave of outbreak may make these activities difficult to plan. However, remote apps like video chat and EVites make it possible for families to still connect for large gatherings from a distance. Here are some of the best apps for remote family reunions that can ensure you and your family are still able to enjoy time together.
Best Video Chat Apps for Family Reunions
We’re probably all familiar with easy video chat apps like Facetime, but there are others that allow for many users to join at once. Connecting over these can be done from a desktop or laptop computer, as well as mobile devices like phones and tablets. Most of these are free and just need one person to host the event from their device and invites to be sent to others.
Planning reunions and get togethers can be a logistical difficulty, particularly when you a large guest-list. This is even more true from a distance, as more folks may be able to join without the added difficulty of traveling far distances. For that reason, EVites and digital invitation apps are a big help. In addition to being a convenient way to keep track of who’s joining your event, these apps also feature beautiful design options that can give your invitation that personalized and colorful feel you crave.
Best Polling Apps for Family Reunions
Everyone seems to have an opinion when it comes to event planning. Whether it’s about the group activities, timing questions, or decisions about which video chat app to use, a polling application can allow a user to ask questions and get a precise count as to which options work best. You might use these to ask questions like, “What day works best for our virtual family reunion,” or, “Which games do we want to play?”
Did you know you can sell all or a portion of a life insurance policy, even term insurance?
Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash. Contact us today to learn more.
Life Settlement Advisors
For one reason or another, you may need to take some money out of an IRA before reaching retirement. You can withdraw money from an IRA at any time and for any reason, but it's important to keep in mind that most IRA withdrawals are at least partially taxable. In other words, you'll owe regular income tax on the amount. In addition, the taxable portion of a withdrawal taken before age 59 1/2, which is called an "early withdrawal," will be hit with a 10% penalty — unless you qualify for an exception.
The exceptions apply to traditional IRAs, SEP-IRAs and SIMPLE-IRAs. (However, some early withdrawals from SIMPLE-IRAs are hit with a 25% penalty rather than the standard 10% penalty. For simplicity, the rest of this article will ignore that higher 25% rate.)
Also, be aware that different rules apply to withdrawals from Roth IRAs and qualified plans, such as 401(k) plans.
Exceptions to the Penalty
So what are the exceptions to the 10% early withdrawal penalty? Let's take a look:
1. Withdrawals for medical expenses. If you have qualified medical expenses in excess of 10% of your adjusted gross income (AGI) in 2020 (and 2019) early IRA withdrawals up to the amount of that excess are exempt from the 10% penalty. To take advantage of this exception, you don't need to trace the withdrawn amount to the medical expenses. However, those expenses must be paid in the same year during which you take the early withdrawal.
2. Substantially equal periodic payments (SEPPs). These are annual annuity-like withdrawals that must be taken for at least five years or until you reach age 59 1/2, whichever comes later. The rules for SEPPs are complicated, so you may want to get your tax advisor involved to avoid pitfalls.
3. Withdrawals after death. Amounts withdrawn from an IRA after the IRA owner's death are always free of the 10% penalty. However, this exception isn't available for funds rolled over into a surviving spouse's IRA or if the surviving spouse elects to treat the inherited IRA as his or her own account. If the surviving spouse needs some of the inherited funds, they should be left in the inherited IRA (in other words, the one set up for the deceased spouse). Then, the surviving spouse can withdraw the needed funds from the inherited IRA without any 10% penalty.
4. Withdrawals after disability. This exception applies to amounts paid to an IRA owner who is found to be physically or mentally disabled to the extent that he or she cannot engage in his or her customary paid job or a comparable one. In addition, the disability must be expected to:
6. Withdrawals for qualified higher education expenses. Early IRA withdrawals are penalty-free to the extent of qualified higher education expenses paid during the same year. The qualified expenses must be for the education of:
8. Withdrawals by military reservists called to active duty. This exception applies to certain early IRA withdrawals taken by military reserve members who are called to active duty for at least 180 days or for an indefinite period.
9. Withdrawals for IRS levies. This exception applies to early IRA withdrawals taken to pay IRS levies against the account. However, this exception is not available when the IRS levies against the IRA owner (as opposed to the IRA itself), and the owner then withdraws IRA funds to pay the levy.
Before and After a Withdrawal
With some exceptions, IRA owners who make IRA withdrawals before age 59 1/2 must file a form with their tax returns. Specifically, they must file Form 5329, "Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts."
If you think you qualify for an exception to the 10% penalty on early traditional IRA withdrawals, consider involving your tax pro before making a big early withdrawal. You want to be sure that you do indeed qualify. Better safe than sorry!
Early Withdrawal Downsides
Even if you qualify for an exception to the 10% early withdrawal penalty, remember that you still have to pay regular income tax on the amount. And you'll lose out on the benefit of future tax-deferred compounding growth on the withdrawn funds.
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