Use Your Retirement Savings Before Retirement–Without Penalties

Traditionally, Individual Retirement Accounts, IRA’s, are used for retirement (no, duh) but there are times when people can pull money from these accounts before retirement without penalties from the IRS.

Don’t get me wrong, there are strict tax laws governing early distributions of traditional IRA and Roth IRA accounts. Typically, withdrawals taken before age 59 ½ are considered premature and doing so could put you on the hook for a 10 percent penalty along with any income taxes that might be owed. 

But like just about everything else, there are exceptions to the rule.  There are times when good ol’ Uncle Sam will look the other way and say it’s okay to tap into these accounts. 

Two of the most commonly used early distribution exceptions are: paying higher education costs and down payments for purchasing a house. 

TIAA-CREF Financial Services conducts an annual survey on individual retirement accounts and American’s saving habits. 21 percent of this year’s respondents (those with an IRA and no employee-sponsored retirement plan) said they planned to use their IRA to either help pay for higher education (12 percent) or help with a down payment on a new house (9 percent).  

These penalty-free withdrawals don’t come without guidelines. According to the IRS, when paying for higher education you can use the money for yourself, your spouse, your children, or grandchildren at any IRS approved school. The money can be used for tuition, fees, books, supplies; and if enrolled for enough hours, room and board.

The home buying exception is for first-time homebuyers. But if the house you want to purchase isn’t your first don’t despair, you can still qualify if you and your spouse have not owned a primary residence anytime during the previous two years. 

Like paying for higher education, you can also spread the money around by providing the down payment for a parent, child, or grandchild; just make sure you don’t pull the money out too soon—you must use it within 120 days of withdrawal.  And if for some reason the sale falls through, make sure you put the money back right away.

Roth IRA’s work a little differently. You can still access them early for purchasing your first home, but you must have had your Roth account for at least 5 years to avoid the 10 percent early withdrawal penalty. 

According to Bankrate.com members of the military can also take early IRA distributions without penalty if: you are ordered or called to active duty after September 11, 2001; you are ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a reserve unit; and the distribution is from an IRA or from an elective-deferral plan, such as a 401(k) or 403(b) plan or similar arrangement.  But these early distributions cannot be taken before receiving orders or called to active duty or after active duty period ends. 

There are also other circumstances when early distributions are allowable penalty-free.  These are hardship situations that are tough to face such as (but not limited to): payment of medical insurance premiums while unemployed, payment of excessive unreimbursed medical expenses, payment for an IRS levy, or payments if you become disabled. 

If you don’t want to take an early withdrawal from an IRA you might have another option—borrow from your 401(k) plan. Since it’s already your money it is usually simpler than getting a loan elsewhere and interest rates on 401(k) loans are typically lower than other rates you might be offered (depending on your plan). Plus, the interest you pay goes back to yourself.  Normally you would not want to do this except in the case of an emergency and when you feel your position within the company is secure. If you are laid off or if you leave, you usually must pay back your loan within 60 days or it will become taxable income and could also be subject to early withdrawal penalties. 

Most people put money into retirement accounts intending to use them for just that, retirement. But it’s good to understand what other options exist should the need arise.

Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners.  Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 10 years.

 

 

Mistake on Your Tax Return? Now What?

Tax-filing season is a stressful and confusing time for a lot of people. If you are like me, you feel a sense of accomplishment and relief when your tax return is finally completed and sent off to the IRS. But what do you do if you realize you made a mistake and the tax return you sent was incorrect?

Don’t feel bad, it’s actually a fairly common occurrence and no wonder. According to Wolters Kluwer, CCH; global provider of tax, accounting, and audit information, there are over 73,954 pages explaining the U.S. federal tax code! 

If the mistake you discover is a math error or if forgot to send in a form such as your W-2 or schedules, the IRS says not to worry about it. You do not need to send in an amended return. They will catch the math error and send you a request for any missing forms. However, if the mistake you made is regarding your filing status, number of dependents, total income, tax deductions, or if tax credits were reported incorrectly or omitted, an amended tax return needs to be filed.

When filing an amended return do not use the standard Form 1040, that will just confuse the IRS—and no one wants that. Use the Form 1040X (Amended U.S. Individual Income Tax Return) when filing your amended return and mail it in. You cannot e-file the Form 1040X. Don’t let the thought of filing an amended tax return scare you.

The 1040X is actually fairly straightforward. It has three columns. Column A shows the figures from your original return, column B shows the changes you are making, and column C shows the corrected amounts. There is also a place on the back of the form where you can provide, if necessary, an explanation of the changes.

If you are expecting an additional refund after filing the amended return, the IRS says to wait until you have received your original refund before filing the Form 1040X—but you can go ahead and cash your refund check while waiting for your additional refund.

Typically, you have 3 years from the date you filed your original tax return or 2 years from the date you paid the tax—whichever is later—to claim your refund.

If your amended tax return indicates you owe additional money, file and pay the additional tax as soon as possible to limit interest and penalty charges. If there is a reasonable explanation as to why you are late paying the additional tax, make sure you fill out the area on the back of Form 1040X indicating why you are late. The IRS may forgive some of the penalties.

Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners.  Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 10 years.

 

Americans Are Confident Regarding Their Financial Future, But Should They Be?

As we discussed in a previous blog, April is Financial Literacy Month.  NerdWallet, the personal finance website for consumers, and The National Foundation for Credit Counseling (NFCC) weighed in on this topic by releasing the results of their 2015 Financial Literacy Survey.

More than 2,000 adults responded to the online survey and a whopping 92 percent said they are very or somewhat confident in their most recent big financial decision (e.g. refinancing a mortgage, buying a car, or picking a credit card). And almost two out of three said they deserve an “A” or a “B” for their own personal financial knowledge.

However, 70 percent of these same people said they are currently worried about their finances. And it’s no wonder since the survey showed: 60 percent spend without the benefit of a budget, 20 percent spend more than they make, and 60 percent do not have a rainy day fund.

“These findings portray a bigger picture of the financial literacy knowledge American’s lack today,” said Cliff Goldstein, personal finance analyst for NerdWallet. “When we asked respondents where they save or invest their money, we were shocked to find out that, although 65 percent of Americans use a savings account, less than three in ten use potentially higher-yielding investment vehicles such as 401(k) (29 percent) or IRA (25 percent).”

Only 6 percent of those surveyed feel their student loans were a good investment.  “Many Americans are spending their adult lives slowly chipping away at a mountain of student loan debt only to find themselves approaching retirement later in life with little or no savings,” said Susan Keating, president and CEO of the NFCC. “The stakes are too high for consumers to let misplaced confidence get in the way of sound financial decisions.”

Think about your own financial literacy. I’m going to leave you with this one question.  In the immortal words of Joey Tribbiani, “How you doin’?”   

Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners.  Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 10 years.