Laid Off in San Diego

IRA accounts are designed for retirement. If a person decides they want to access their account prior to age 59 1/2, they will incur a Federal Income Tax penalty for early withdrawal of 10% of the amount withdrawn. In addition, the amount withdrawn is deemed ordinary income and taxed as such. If that weren’t bad enough of a deterrent from early withdrawals, some states also have an early withdrawal penalty, for example in California it is 2.5%. So, if a person taking an early withdrawal is in the 25% income tax bracket, they would pay 25% income tax, plus 10% Federal penalty, plus 2.5% California penalty for a total tax of 37.5%.

This is intended to discourage people from invading retirement plans early. And, it generally works.

However, there are occasional cases in which a person simply must begin taking funds from their IRA. There is a way to avoid these penalties. It is known as the SEPP or “Substantially Equal Periodic Payments” plan also identified by the tax code as 72(t). These payments must continue until the person is age 59 1/2 or 5 years, whichever is later. If these payments are modified, all of the prior payments become subject to the penalties. You must be very careful about violating the rules if you embark on this plan.

Here is the story about someone who innocently got stung by “modifying” her payments. (more…)

If your 401(k) investment options suck or if they are just plain too expensive and eat up your retirement returns while feathering the bed of the plan’s broker, move your money where you can control your investment options and fees.

Let’s say you now age 60 and don’t plan to retire from your job for another five years, and your 401(k) plan is very expensive and has less poor investment options. You can roll your $1 million 401(k)(or less – don’t we all wish our 401(k)’s were worth at least $1 million?), into an individual retirement account (IRA), using a little-known maneuver known as an “in-service” non-hardship distribution. (more…)

 Under current law, Qualified Retirement Plan (QRP) Participants are able to roll over taxable distributions from qualified plans and IRAs to 403(b) and government 457 plans, in addition to other qualified plans and IRAs. But be sure you look before you leap, these plans are not be required to accept rollovers. QRP Participants are also be able to rollover distributions of after-tax employee contributions from qualified plans or an IRA to a defined contribution plan or IRA. A rollover of after-tax amounts to a defined contribution plan must be transmitted through a trustee-to-trustee transfer. The accepting plan must separately account for the after-tax amounts.

Spouses who who have been widowed and participate in a 403(b), government 457 or qualified plan may roll over distributions from their deceased spouse’s plan into their own plan, provided the accepting plan includes a rollover provision. And with IRS approval, the 60-day period in which to make a rollover can be extended if not doing so would be against “equity or good conscience,” as stated by the law. Examples of instances when the waiver of the 60-day period will be considered appropriate include matters outside the control of the individual, such as a natural disaster, hospitalization or a failure of a financial institution to process the rollover in a timely manner (and this does happen, just ask me).

Below is a chart indicating what can be rolled over into what. 

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I am going to give you some advice that could mean the difference between an “enjoyable” retirement one day and a “just get by” retirement. In this post, I will share with you principles that will really make a difference and keep you out of the kind of trouble even “sophisticated” investors find themselves in. If you heed this advice, you will never have to worry about getting fleeced by some crook like Bernie Madoff, the broker who ran a ponzi scheme that allegedly stole around $50 Billion from both institutions and individuals.

So, here goes: (more…)