Category Archives: Retirement

6 Ways to Make an Early, Penalty-Free Withdrawal From Your Retirement Fund

After years of contributions to your retirement fund, you may need to withdraw money to pay for an expense. Typically, withdrawals made from retirement accounts, e.g. a 401(k) or IRA, made before age 59 ½ are subject to a 10% early withdrawal penalty. There are some instances that you can take money from your retirement fund without having to pay the penalty. You may, however, still be subject to income taxes on the amount you withdrew.

Use it for Medical Expenses

You can withdraw from your retirement fund to pay for medical expenses that aren’t covered or reimbursed by your health insurance company. The total amount of the expense must not exceed 10% of your adjusted gross income and withdrawal must be made in the same year the medical expense occurred.

This exception applies to: Qualified plans like a 401(k), IRA, SEP, SIMPLE IRA, and SARSEP Plans

Pay Health Insurance Premiums After a Job Loss

You can make a penalty-free withdrawal from your IRA to pay health insurance premiums for yourself, your spouse, or dependent children if you lose your job and collect unemployment for 12 consecutive weeks. Unfortunately, this penalty-free withdrawal doesn’t apply to 401(k) plans.

This exception applies to: IRA, SEP, SIMPLE IRA, and SARSEP Plans

Use It for Higher Education Expenses

You’re allowed to use retirement funds to pay for college-related expenses including tuition, fees, and room and board for yourself, your spouse, your children, or grandchildren. (Room and board only qualify for students who are enrolled at least half-time.) The early withdrawal must be used to pay for education expenses at a qualified institution to avoid the penalty.

This exception applies to: IRA, SEP, SIMPLE IRA, and SARSEP Plans

Use it Towards Your First Home Purchase

You can withdraw up to $10,000 ($20,000 for couples) to use toward the purchase of your first home. The home purchase doesn’t have to technically be your “first” home purchase. The IRS only requires that you haven’t owned a home that served as your primary residence within the previous two years.

This exception applies to: IRA, SEP, SIMPLE IRA, and SARSEP Plans

Cover Expenses After a Disability

The IRS allows you to withdraw from your retirement fund without paying a penalty if you’ve suffered “total and permanent disability. You’ll have to provide documentation you’re your physician or insurance company to show you qualify.

This exception applies to: Qualified plans like a 401(k), IRA, SEP, SIMPLE IRA, and SARSEP Plans

Withdraw Any Excess You Paid

The law only allows you to contribute a certain amount to your retirement plan each year. If you mistakenly contribute too much, you can withdraw the excess without penalty. You have until the tax-filing deadline, usually April 15, to withdraw excess contributions from your retirement fund. Otherwise, you face tax penalties.

This exception applies to: Qualified plans like a 401(k)

401(k) Loan as an Alternative

If you need to make an early retirement account withdrawal that doesn’t meet any of the requirements to make a penalty-free withdrawal, you can take a loan against your 401(k) if your employer offers it. A few caveats: you must repay the loan within five years, you miss the opportunity to earn compound interest, and the full balance of the loan may be due if you leave your job before the loan is completely repaid.

Tax Implications

Make sure you consult with a tax professional to completely understand the tax implications of withdrawing from your retirement fund. Keep all your documents and receipts related to withdrawal and usage of the funds in case you need them for your tax return.

7 Money Habits That Will Help You Retire Early

Latest statistics put the average retirement age at 62, but poor money management and student loan debt may push the age further for some people. If you want to retire earlier, you won’t do it by wishing. You’ll have to adopt some critical money management habits if you want to shave a few years off your retirement age.

Save First

Most people pay all their bills and expenses then save what’s left – if there’s anything left to save. If you want to retire early, you have to make saving a priority. Reverse your thinking and put money in savings first, based on a budget of course, then live on what’s left. To make it even easier, set up an automatic savings transfer to occur regularly a day or two after each payday.

Plug Up The Leaks

You’ll be able to save more money if you can cut back on spending and cost of living. Review your spending and identify places where you’re spending money unnecessarily. Cutting back may require more drastic measures like moving into a smaller home or trading for a less expensive home. Not only do spending reductions let you save for early retirement, they also minimize your living expenses and the amount you need to retire early.

Start Saving Early

If you haven’t started saving for retirement, you’re already behind. The longer you wait, the more you’ll have to set aside to reach your retirement savings goal. Don’t wait for some elusive milestone (like paying off debt or getting your next raise) to start saving – do it today.

Avoid Debt Like The Plague

Every dollar you spend on debt is a dollar you could have contributed to your retirement. Paying interest on debt is even worse because you’re paying a cost for the convenience of paying your lender over time instead of all at once. Work aggressively to pay off the debt you already have, then start saving all the money you were putting towards your debt. In the future, save up for big purchases rather than financing with expensive loans or credit cards.

Maximize Your Income

This might mean getting a second job, starting a business, or owning rental property. Or, it could mean advancing in your career, getting promotions and raises. No matter which path you choose, making more money means you have more money to set aside for an early retirement. If you can figure out how to create a reliable stream of passive income, it can serve as a revenue stream that can help you retire earlier.

Live Like You’re A Millionaire

If you think this means you should go on expensive vacations, buy a luxury car, and start wearing designer labels, you’ve been watching too much television. Most millionaires don’t live the lavish lives you see on the big screen – they don’t spend money on things that lose value. Instead, they’re more frugal than not and very disciplined with spending. Reaching your early retirement goal will require the same of you.

Get Professional Help When You Need It

You may not be able to save for an early retirement all on your own. A financial advisor can help you figure out the best way to save and invest so you can reach your goals. Make sure you choose an experienced, licensed advisor who can clearly explain various investment options and strategies to you.

Roth IRAs Are Great Options for Young Professionals

Roth IRAs Are Great Options for Young ProfessionalsSaving for retirement may seem like a low priority if you are in your 20s. The pressures to pay off your student loans and save for a house seem more urgent. But the benefit of compounding interest is on your side and there is one financial product that stands above the rest – the Roth IRA. The benefits are so significant that every young person should take advantage and work hard to fully contribute each year.

The Benefits of a Roth IRA

A Roth IRA allows you to set aside money after taxes. You can contribute up to $5,500 in a Roth for 2015 if you are a single filer making less than $116,000 per year or a married couple making less than $183,000 per year. There are many great benefits to a Roth.

Tax-free income in retirement – Let’s start with the biggest benefit first. As noted earlier, people contribute to a Roth after taxes. The benefit to the saver is that he or she gets to draw the contributions and earnings tax free starting at age 59 ½. This fact means you get a tax free income stream in your retirement. If you contribute $5,500 annually (and the maximum contribution will increase from age 27 to age 67 (full retirement age for Social Security for anyone born in 1960 or later), your $220,000 in contributions is now worth over $1 million dollars. You are now a millionaire even before you count home equity, 401(k), or other assets. This scenario even assumes a very high marginal tax rate.

Withdraw contributions tax free – You might find yourself in a severe financial pinch at some point in the future. Unlike other savings vehicles, you can withdraw contributions (but not earnings) tax free. The after tax nature of Roth contributions means that you already met your tax obligations. Be aware that if you withdraw earnings you will face tax penalties.

Flexibility – You pick from an array of investments that are best for you, whether that’s stocks, bonds, real estate, or something else. You can still (and should!) participate in other retirement accounts such as a 401(k) and traditional IRA too. Just keep in mind your IRA contributions (Roth and traditional) cannot exceed $5,500 in 2015.

Other People Can Contribute to Your Roth – Generally, a person needs to have taxable compensation in order to fund a Roth IRA. There is an important exception. A spouse with taxable compensation can contribute to the Roth of the spouse with no taxable compensation. For instance, someone who makes $70,000 in a year can contribute up to $5,500 to the Roth of his stay-at-home mom.

If you are single, there is a way for relatives to contribute to your Roth. The key rule here is that a contribution cannot exceed a person’s taxable income. This statement means that if you are a college student making $4,000 a year in taxable compensation from summer and part-time employment, a parent or grandparent, per the IRS website, can contribute up to $4,000 to your Roth.

An All-Around Great Deal

A Roth IRA is a great way to build a retirement nest egg. It really rewards people who plan ahead and diligently save for retirement. You get the benefit of a tax free pool of money to finance your retirement expenses. Start saving today, saving in your 20s is way easier than saving later in life!

Other Roth Options

The Roth IRA is definitely the first-stop for retirement contributions for young people, but not the only place you can get the Roth advantages. There are Roth versions of 401(k), 403(b) and 457(b) plans, so if you are offered one of these by your employer, you should consider taking advantage! They’re not quite as flexible as the Roth IRA, but they do provide a great tax benefit if you’re in a low tax bracket.