The list of these options has grown.

Provided by Marc Aarons at Money Managers, Inc.

An IRA, or Individual Retirement Account, is a tax-advantaged savings account that is subject to special rules regarding contributions and withdrawals. One of the central rules of IRAs is that withdrawals prior to age 59½ are generally subject to a tax penalty because policymakers sought to create a disincentive to use these savings for anything other than retirement.1.

Yet, policymakers acknowledged that extenuating circumstances might require access to these savings prior to one’s second act. In appreciation of this, the list of exceptions for waiving this penalty has grown over the years.

Penalty-Free Withdrawals. Outlined below are the circumstances under which individuals may withdraw from an IRA prior to age 59½, without a tax penalty. Ordinary income tax, however, is generally due on such distributions.1

Death – If you die prior to age 59½, the beneficiary(ies) of your IRA may withdraw the assets without penalty. However, if your beneficiary decides to roll it over into their IRA, they will forfeit this exception.

Disability – Disability is defined as being unable to engage in any gainful employment because of a mental or physical disability, as determined by a physician.

Substantially Equal Periodic Payments – You are permitted to take a series of substantially equal periodic payments and avoid the tax penalty, provided they continue until you turn 59½ or for five years, whichever is later. The calculation of such payments is complicated, and individuals should consider speaking with a qualified tax professional.

Home Purchase – You may withdraw up to $10,000 toward the purchase of your first home ($20,000 for a married couple). You cannot have owned a home within the last two years.

Un-reimbursed Medical Expenses – This exception covers medical expenses in excess of 10% of your adjusted gross income.

Health Insurance – After a job loss, there are rules in place that allow the purchasing of health insurance, penalty free.

Higher-Education Expenses – Funds may be used to cover higher-education expenses, such as tuition, student fees, textbooks, supplies, and equipment. Only certain institutions and associated expenses are permitted.

Active Duty Call-Up – Reservists who make an IRA withdrawal during a period of active duty of 180 days or longer do not have to pay a 10% early withdrawal penalty.2,3,4

As always, be sure to speak with a tax professional about your specific situation.

Marc Aarons may be reached at (714) 887-8000 or Marc@OcMoneyManagers.com 

^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
With an IRA, once you reach age 70½, generally you are obligated to begin taking required minimum distributions.
Your required minimum distribution (RMD) may be based on your age or the deceased’s age at the time of death. Penalties may occur for missed RMDs. Most are required to begin by December 31 of the year following the date of death. Any RMDs due for the original owner must be taken by their deadlines to avoid penalties. You will pay taxes on any distributions you take. Consider speaking with a financial professional who can help you evaluate the potential impact an inheritance might have on your overall tax situations.
The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Federal and state laws and regulations are subject to change, which may have an impact on after-tax investment returns. Please consult legal or tax professionals for specific information regarding your individual situation.
The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.}

^{MMI Disclosure}

^{Citations.
1 – https://www.marketwatch.com/story/gearing-up-for-retirement-make-sure-you-understand-your-tax-obligations-2018-06-14 [6/14/18]
2 – https://www.investopedia.com/articles/personal-finance/102815/rules-rmds-ira-beneficiaries.asp [2/21/18]
3 – https://money.usnews.com/money/retirement/slideshows/ways-to-avoid-the-ira-early-withdrawal-penalty [11/7/18]
4 – https://www.investopedia.com/articles/retirement/02/112602.asp [10/7/18]}

The post IRA Withdrawals That Escape the 10% Penalty appeared first on Money Managers, Inc..

Take note of them for 2019.

 Provided by Marc Aarons at Money Managers, Inc 

    Some notable developments are about to impact 401(k) plans. They follow a major change that became effective in 2018. Thanks to the Tax Cuts & Jobs Act, workers who borrow from 401(k) accounts and leave their jobs now have until October of the following year to repay plan loans.¹

  The Internal Revenue Service has eased the rules on 401(k) hardship distributions. Plan participants who arranged such withdrawals in 2018 (and years prior) paid an opportunity cost. The Internal Revenue Code barred these employees from making periodic contributions to their 401(k) accounts for six months after the withdrawal, and it also prevented them from exercising any stock options for that length of time.²

   In 2019, some flexibility enters the picture. The Bipartisan Budget Act of 2018 (passed in February) allows plan sponsors to remove both of those restrictions in 2019, if they wish.²

  Some fine print worth noting: the BBA also permits plan sponsors to give employees more sources for hardship withdrawals. In 2019, plan participants may take hardship distributions from their 401(k) account earnings, qualified non-elective employer contributions (QNECs), and qualified matching contributions (QMACs) in addition to elective deferral contributions, discretionary employer profit-sharing contributions, regular matching contributions, and earnings on contributions made before December 31, 1988.²

In 2018 and years prior, a plan participant could only take a hardship distribution after taking a loan from his or her 401(k) account. Next year, plan sponsors can waive this requirement, if they choose, and let their employees take hardship withdrawals from 401(k)s without a loan first.²

   In addition, plan sponsors may let victims of California wildfires make special hardship withdrawals. An individual who suffered economic losses due to the massive fires in the Golden State (and whose principal residence is in a California wildfire disaster area) may take qualified wildfire distributions of up to $100,000 from a 401(k) through December 31, 2018. The money withdrawn is fully taxable, but the withdrawal is not subject to a 10% early withdrawal penalty. The amount withdrawn can also be recontributed to the plan within three years of the distribution. This type of hardship withdrawal may be permitted immediately; the plan sponsor has until the last day of the first plan year, beginning on or after January 1, 2019, to revise the plan documents to denote the new terms.²

  What do these rule changes mean for companies sponsoring 401(k) plans? The message is clear. Review your plan documents and hardship withdrawal guidelines before 2019 begins, and decide whether you want to include these provisions.

     Lastly, annual contribution limits for 401(k) accounts are rising. An employee can put up to $19,000 into a 401(k) in 2019, up from $18,500 in 2018. The annual limit on “catch-up” contributions, allowed for plan participants aged 50 or older, remains at $6,000.³

                Marc Aarons may be reached at (714)887-8000 or Marc@OCMONEYMANAGERS.com

^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.}

^{MMI Disclosure}

    ^Citations.

^{1 – forbes.com/sites/ashleaebeling/2018/01/16/new-tax-law-liberalizes-401k-loan-repayment-rules/ [1/16/18]
2 – pillsburylaw.com/en/news-and-insights/recent-and-upcoming-changes-to-401k-plans.html [3/8/18]
3 – nytimes.com/2018/11/09/your-money/401k-contribution-limits-raised-irs.html [11/9/18]}

The post Some Changes Are Coming for 401(k)s appeared first on Money Managers, Inc..

Why you should refrain from making this move.

Provided by Marc Aarons at Money Managers, Inc. 

 Thinking about borrowing money from your 401(k), 403(b), or 457 account? Think twice about that because these loans are not only risky, but injurious, to your retirement planning.

  A loan of this kind damages your retirement savings prospects. A 401(k), 403(b), or 457 should never be viewed like a savings or checking account. When you withdraw from a bank account, you pull out cash. When you take a loan from your workplace retirement plan, you sell shares of your investments to generate cash. You buy back investment shares as you repay the loan.¹

In borrowing from a 401(k), 403(b), or 457, you siphon down invested retirement assets, leaving a smaller account balance that experiences a smaller degree of compounding. In repaying the loan, you will likely repurchase investment shares at higher prices than in the past – in other words, you will be buying high. None of this makes financial sense.¹

Most plan providers charge an origination fee for a loan (it can be in the neighborhood of $100), and of course, they charge interest. While you will repay interest and the principal as you repay the loan, that interest still represents money that could have remained in the account and remained invested.^1,2

As you strive to repay the loan amount, there may be a financial side effect. You may end up reducing or suspending your regular per-paycheck contributions to the plan. Some plans may even bar you from making plan contributions for several months after the loan is taken.^3,4

Your take-home pay may be docked. Most loans from 401(k), 403(b), and 457 plans are repaid incrementally – the plan subtracts X dollars from your paycheck, month after month, until the amount borrowed is fully restored.¹

  If you leave your job, you will have to pay 100% of your 401(k) loan back. This applies if you quit; it applies if you are laid off or fired. Formerly, you had a maximum of 60 days to repay a workplace retirement plan loan. The Tax Cuts & Jobs Act of 2017 changed that for loans originated in 2018 and years forward. You now have until October of the year following the year you leave your job to repay the loan (the deadline is the due date of your federal taxes plus a 6-month extension, which usually means October 15). You also have a choice: you can either restore the funds to your workplace retirement plan or transfer them to either an IRA or a workplace retirement plan elsewhere.²

If you are younger than age 59½ and fail to pay the full amount of the loan back, the I.R.S. will characterize any amount not repaid as a premature distribution from a retirement plan – taxable income that is also subject to an early withdrawal penalty.³

Even if you have great job security, the loan will probably have to be repaid in full within five years. Most workplace retirement plans set such terms. If the terms are not met, then the unpaid balance becomes a taxable distribution with possible penalties (assuming you are younger than 59½.¹

Would you like to be taxed twice? When you borrow from an employee retirement plan, you invite that prospect. You will be repaying your loan with after-tax dollars, and those dollars will be taxed again when you make a qualified withdrawal of them in the future (unless your plan offers you a Roth option).^3,4

Why go into debt to pay off debt? If you borrow from your retirement plan, you will be assuming one debt to pay off another. It is better to go to a reputable lender for a personal loan; borrowing cash has fewer potential drawbacks.

You should never confuse your retirement plan with a bank account. Some employees seem to do just that. Fidelity Investments says that 20.8% of its 401(k) plan participants have outstanding loans in 2018. In taking their loans, they are opening the door to the possibility of having less money saved when they retire.⁴

Why risk that? Look elsewhere for money in a crisis. Borrow from your employer-sponsored retirement plan only as a last resort.

   Marc Aarons may be reached at 714-887-8000 or Marc@OCMoneyManagers.com.

^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.}

^{MMI Disclosure}

^{Citations.
1 – gobankingrates.com/retirement/401k/borrowing-401k/ [10/7/17] 2 – forbes.com/sites/ashleaebeling/2018/01/16/new-tax-law-liberalizes-401k-loan-repayment-rules/ [1/16/18] 3 – cbsnews.com/news/when-is-it-ok-to-withdraw-or-borrow-from-your-retirement-savings/ [1/31/17] 4 – cnbc.com/2018/06/26/the-lure-of-a-401k-loan-could-mask-its-risks.html [6/26/18]}

The post Taking a Loan from Your Retirement Plan = Bad Idea appeared first on Money Managers, Inc..