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401(K) Withdrawals: Beware the Penalty Tax

You’ve probably heard that if you withdraw taxable amounts from your 401(k) or 403(b) plan before age 59½, you may be socked with a 10% early distribution penalty tax on top of the federal income taxes you’ll be required to pay. But did you know that the Internal Revenue Code contains quite a few exceptions that allow you to take penalty-free withdrawals before age 59½?

Sometimes age 59½ is really age 55…or age 50

If you’ve reached age 55, you can take penalty-free withdrawals from your 401(k) plan after leaving your job if your employment ends during or after the year you reach age 55. This is one of the most important exceptions to the penalty tax.

And if you’re a qualified public safety employee, this exception applies after you’ve reached age 50. You’re a qualified public safety employee if you provided police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50.

Be careful though. This exception applies only after you leave employment with the employer that sponsored the plan making the distribution. For example, if you worked for Employer A and quit at age 45, then took a job with Employer B and quit at age 55, only distributions from Employer B’s plan would be eligible for this exception. You’ll have to wait until age 59½ to take penalty-free withdrawals from Employer A’s plan, unless another exception applies.

Think periodic, not lump sums

Another important exception to the penalty tax applies to “substantially equal periodic payments,” or SEPPs. This exception also applies only after you’ve stopped working for the employer that sponsored the plan. To take advantage of this exception, you must withdraw funds from your plan at least annually based on one of three rather complicated IRS-approved distribution methods.

Regardless of which method you choose, you generally can’t change or alter the payments for five years or until you reach age 59½, whichever occurs later. If you do modify the payments (for example, by taking amounts smaller or larger than required distributions or none at all), you’ll again wind up having to pay the 10% penalty tax on the taxable portion of all your pre-age 59½ SEPP distributions (unless another exception applies).

And more exceptions…

Distributions described below generally won’t be subject to the penalty tax even if you’re under age 59½ at the time of the payment.

  • Distributions from your plan up to the amount of your unreimbursed medical expenses for the year that exceed 10% of your adjusted gross income for that year (You don’t have to itemize deductions to use this exception, and the distributions don’t have to actually be used to pay those medical expenses.)
  • Distributions made as a result of your qualifying disability (This means you must be unable to engage in any “substantial gainful activity” by reason of a “medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.”)
  • Certain distributions to qualified military reservists called to active duty
  • Distributions made pursuant to a qualified domestic relations order (QDRO)
  • Distributions made to your beneficiary after your death, regardless of your beneficiary’s age

Keep in mind that the penalty tax applies only to taxable distributions, so tax-free rollovers of retirement assets are not subject to the penalty. Also note that the exceptions applicable to IRAs are similar to, but not identical to, the rules that apply to employer plans.

 

Important Disclosure
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One of The Worst Retirement Advice You Can Get (And The Secret to Spotting It)

Imagine saving your whole life for retirement. You sacrifice a better car, summer vacation and all the other bells and whistles your friends seem to be enjoying all in the name of a secure retirement.

You have accumulated a nice little nest egg – one big enough to afford you a comfortable, work-free lifestyle.

Now it’s time to retire. You might have to roll over your employer-sponsored 401k into an IRA. You have to figure out your budget and how much to withdraw each month. These are typical decisions retirees must make.

But then you get bad advice. Very bad advice.

The Mistake That Can Cost You Everything

Here’s where it all goes downhill: you talk to a financial advisor who tells you to put your money into XYZ investment. It’s great for the advisor, because XYZ has high commissions and high fees – so they are getting a nice little check from your money. The problem is that XYZ investment is a high risk stock – which means, if you’re retired, you have no time to recover from losses.

The 401k Rollover Crisis

This one bad investment decision is not unusual for so many Americans. They end up in the wrong advisor’s office and, with the stroke of a pen, lose their entire retirement savings – or a very big chunk of it. Now, you have to go back to work – without any chance of rebuilding what you worked so hard to create.

In fact, Vanguard founder Jack Bogle recently said that bad advice while rolling over 401ks is one of the top three retirement crises.1

 

The Fiduciary Rule

We talked about the Fiduciary Rule here, in one of our recent articles. This rule, adopted by the Department of Labor, requires financial advisors to put their clients’ financial well-being above their own. This means if there’s a better product for the client, but less commission for the advisor – the advisor will recommend that product.

➢ However, just because this rule is in place doesn’t mean you should get complacent.  

How to Spot Bad Financial Advice

  1. How Is Your Financial Advisor Earning Money?

Ask your advisor how he or she is getting paid. You want to be sure your advisor is offering you the best products for your goals – not the best product for their bank account.

  1. Is Your Financial Advisor Asking the Right Questions?

If your advisor doesn’t understand your retirement goals, then there is little chance he is going to create a solid financial strategy for you. A good advisor will ask questions.

➢ When do you want to retire?

➢ What will your income streams be? For example, do you have rental property or a pension?

Not only will your advisor ask questions, but he or she will also follow up with you regularly to adjust your investments as you near retirement.

An advisor who doesn’t understand your goals and just locks you into a payment plan, is not someone you may want to trust with your financial future.

  1. “I Can Outsmart the Market!”

If your advisor promises high returns or that they can beat the market, then you should run – not walk – out of their office. A respected advisor usually does not promise huge returns, without divulging the huge risks.

What to Look For In an Advisor 

Ask Around

A great first step in choosing an advisor is getting excellent recommendations from friends.

 

Do some research online and learn about their history – have they been in business long?

Do Some Digging

Next, you should run a background check. Find out if your advisor has ever been convicted of a crime or if he or she has been investigated by a regulatory body.

Here are two good resources:

➢ FINRA Broker Check – BrokerCheck tells you instantly whether a person or firm is registered, as required by law, to sell securities (stocks, bonds, mutual funds and more), offer investment advice or both. It also gives you a snapshot of a broker’s employment history, licensing information and regulatory actions, arbitrations and complaints.

➢SEC’s Investment Adviser Public Disclosure – You can search for an individual investment adviser representative and view that individual’s professional background and conduct, including current registrations, employment history, and disclosures about certain disciplinary events involving the individual.

Get Real Answers

Finally, ask questions – and get clear answers. If a potential advisor is using complicated jargon to explain his investment strategies, then you should keep moving. A good advisor will lay everything on the table. You should be crystal clear on what fees and commissions you’re paying, what the investment strategy is, how exposed you are to the market and what you can expect in returns.

Once you decide on an advisor, be sure to check on your investments regularly. As you get closer to retiring, you should check more often.

 

1http://time.com/money/4513522/jack-bogle-bogleheads-retirement-crisis/

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Getting Divorced Checklist

General information Yes No N/A
1. Has relevant personal information been gathered?
• Each spouse’s name, date of birth, and Social Security number
• Names and birth dates of children
• Date and place of marriage and length of time in present state
• Information about prior marriages and children
• Date of separation and grounds for divorce
• Current occupation of spouses and name/address of employers
• Education and degrees of each spouse
• Name, address, and telephone number of attorney		 ▢ ▢ ▢
2. Has financial situation been assessed?
• Each spouse’s name, date of birth, and Social Security number
• Names and birth dates of children
• Date and place of marriage and length of time in present state
• Information about prior marriages and children
• Date of separation and grounds for divorce
• Current occupation of spouses and name/address of employers
• Education and degrees of each spouse
• Name, address, and telephone number of attorney		 ▢ ▢ ▢

PROPERTY SETTLEMENTS Yes No N/A
1. Does prenuptial agreement exist? ▢ ▢ ▢
2. Do spouses reside in a community property state? ▢ ▢ ▢
3. Have all assets been listed, valued, and classified as joint or
separate?		 ▢ ▢ ▢
4. Have the tax bases of all assets been determined? ▢ ▢ ▢
5. If assets will be transferred or sold, have tax consequences been
calculated and explained to client?		 ▢ ▢ ▢
6. Have loans and other liabilities on the properties (or otherwise) been
listed and considered?		 ▢ ▢ ▢
7. Is there a family business? ▢ ▢ ▢

ALIMONY AND CHILD SUPPORT Yes No N/A
1. Have tax consequences of classifying support as alimony or child support been reviewed? ▢ ▢ ▢
2. Has physical custody of children been determined? ▢ ▢ ▢
3. Has legal custody of children been determined? ▢ ▢ ▢
4. Have visitation parameters been established for the noncustodial parent? ▢ ▢ ▢
5. Will alimony be paid? ▢ ▢ ▢

MARITAL HOME Yes No N/A
1. Will home be transferred to either spouse as part of settlement? ▢ ▢ ▢
2. If yes, has cost basis been reviewed for improvements? ▢ ▢ ▢
3. Has amount of outstanding mortgage been calculated? ▢ ▢ ▢
4. Will the principal residence be sold to a third party? ▢ ▢ ▢
5. If yes, has the tax cost (if any) been computed? ▢ ▢ ▢

RETIREMENT PLANNING Yes No N/A
1. Have retirement plans been listed and interests in retirement plans been reviewed? ▢ ▢ ▢
2. Will the divorce decree provide a payout from the plan? If so, will a qualified domestic relations order (QDRO) be used? ▢ ▢ ▢
3. Should beneficiary designations be changed? ▢ ▢ ▢
4. Will any IRS penalties apply? ▢ ▢ ▢
5. Can retirement money be rolled over to IRA? ▢ ▢ ▢

TAX PLANNING Yes No N/A
1. If already divorced, was divorce finalized by year-end? ▢ ▢ ▢
2. If still married at year-end, agree to file jointly? ▢ ▢ ▢
3. Have joint filing risks been discussed? ▢ ▢ ▢
4. Has separate maintenance decree been obtained to permit filing as unmarried or head of household? ▢ ▢ ▢
5. Have head of household conditions been met? ▢ ▢ ▢
5. Has it been decided which spouse will get dependency exemption? ▢ ▢ ▢

other Yes No N/A
1. Should will and trust be changed? ▢ ▢ ▢
2. Should insurance policy beneficiaries be changed? ▢ ▢ ▢
3. Should banks and other creditors be notified of divorce and signatures changed? ▢ ▢ ▢
4. Will either spouse’s health insurance plan cover the children post-divorce? Cover spouse? ▢ ▢ ▢
5. Has budget been revised to account for changes in income and liabilities? ▢ ▢ ▢
5. Does credit need to be repaired or established? ▢ ▢ ▢
Important Disclosure
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If You’re Getting a Divorce, You NEED to Do This Now

Put Emotions Aside and Avoid These Four Common Traps

Jen and Steve have been married for eighteen years. They have two children, 16 and 14, a beautiful home, good jobs, vacations every year and money saved. In short, their life looked picture-perfect. Until Steve asked for a divorce. Blindsided, Jen was unable to function normally. Her emotions were turned to 100. It was as if her world had been t-boned by a semi-truck – driven by her husband. At least that’s how it felt.

Jen was stuck in a whirlpool of anger, sadness, confusion and guilt. Why? What did I do wrong? What could I have done better? What if…?

Jen and Steve are examples of the, approximately 813,000, couples who get divorced every year.1

The 4 Major Mistakes Women Make

But here’s the deal: if you’re a woman who is faced with divorce, you must avoid making these four common mistakes – for your future well-being.

  1. REACTING EMOTIONALLY

Of course you’re emotional, the most important relationship of your life is about to end. This is totally normal.

But you can control how much damage it causes by getting your head together. This is especially important during divorce proceedings.

Here is something you should think about when you’re in the thick of divorce: what do I want my life to look like in two years?

Tap into your innermost desires to paint a picture of your new life, post-divorce.

► Do you want to have financial security?

► Do you want to be able to enjoy all the same things you do now?

► Do you want your children to live in the same neighborhood or go to the same schools?

This picture of your new life is your map for navigating negotiations of finances and assets. Because if one thing is certain: men usually treat divorce like business deals. They leave their emotions outside of the lawyer’s office. And you should, too!

This means if your soon-to-be ex tries to convince you that you don’t need a lawyer, you must put your emotions aside. You should definitely get a lawyer – and one that comes with high recommendations. Also, make sure you don’t empty your bank accounts paying attorney fees.

 You might be tempted to stick it to your husband by taking him to court until he hands over his left kidney – but that may cost you and your family.

So keep cool and look at this like a chess game. You want to the most you can get without hurting yourself.

  1. NOT KNOWING WHAT YOU HAVE OR OWE

This is a biggie. Many women have no idea what they have or what they owe. Here’s a very important piece of advice: if you are thinking about filing for divorce, find out what you have before you do.

 This is why: as soon as the word divorce comes up, your husband will have a head start at hiding assets that might have gone to you and your children. Not all partners will do this, but it happens.

You can either do the detective work yourself (open those bank statements) or hire a forensic accountant to do it for you. The more you know, the better off you will be when it comes time to divide assets.

  1. SETTLING TOO SOON
You might not believe this, but many women walk away from a lot of money – millions even – out of guilt or emotional fatigue.

Let’s talk guilt first. As women, we often try to please. We don’t want to hurt anyone and we don’t want to be judged poorly. Because of this, so many women feel guilty about asking for what they are entitled to.

If they were stay-at-home moms they might feel like they don’t deserve half of the assets. And guess what?

 When they do walk away from their fair share, they often regret it later. The simple reason for this is that emotions clouded their judgment (see #1).

After the dust settles and you begin to see things clearly, it is too late to redo divorce proceedings.

So be smart. Make sure you get the maximum you are entitled to by law.

Remember, many men treat divorce like a business transaction – and you should, too.

Make your partner aware of your intentions: you want what is legally owed to you – nothing more and nothing less. If he bullies or harasses you into settling for a lesser amount, you can avoid talking to him and use a mediator instead.

  1. MISMANAGING MONEY

Once the divorce is over you are now left with your assets. For women who have relied on their spouses for financial support and guidance, this can be a very intimidating situation. This is when many women make irreversible mistakes.

First of all, you might still be emotionally vulnerable. It could take two years (or more) to get over a divorce.2 What does this mean? You could trust the wrong people to help you heal your wounds.

 Predators are very good at spotting potential victims who are often emotionally fragile, hungry for love and companionship.

Predators can come in many forms. They can be a new boyfriend. An unethical financial advisor or attorney. Someone who wants to sell you their business.

Whatever the case may be, you need to secure a financial advisor you can trust. Why is this so important? Easy. It’s important because your advisor will help you manage your assets to achieve the lifestyle you want.

You want to avoid paying tons of fees or locking money into investments that might not match your current situation.

Make sure the advisor comes with excellent recommendations and is a fiduciary.

Click here to visit out our affiliate company PLJ Advisors. And yes, they are fiduciary!

Bottom Line

Divorce is not the end of the world, ladies. You will survive it! The difference between women who handle it rationally and those who let their emotions take the wheel is enormous.

Don’t be afraid to get support from women who have been through it. Make sure you trust the right people. And, finally, don’t short change yourself!

To learn more about what to ask a prospective advisor, read this article: If You Don’t Know What a Fiduciary Is… NOW Is the Time to Find Out

 

1https://www.cdc.gov/nchs/nvss/marriage_divorce_tables.htm
2http://www.huffingtonpost.com/2013/07/30/how-to-move-on_n_3679198.html

 

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60% of Nurses Between 45 and 60 Haven’t Prepared For Retirement. But Why?

We hear so much about the woes of Social Security and what will happen to future generations, that we sometimes forget about today’s retirees. Are they going to have enough for retirement today or in five years?

One such survey, by the Center for American Nurses, paints a bleak picture for nurses. The survey states that 60% of nurses, between 45 and 60, have done nothing – not one thing – to get ready for retirement.

At first look, this might be a startling fact.

How can so many nurses – a group that is educated, responsible and logical, ignore the inevitable? But, upon, closer inspection this number isn’t so shocking after all. And here’s why:

The median amount – all families in the United States have saved – is $5,000, according to the Economic Policy Institute.1

This is not much at all… so maybe it’s not odd that nurses haven’t planned either. Or do they have their own reasons – that might be different from other non-saving Americans?

Nurses Assume They Will Work For a Long, Long Time. But They Shouldn’t.

According to the survey results, reasons nurses are not prepared for retirement are similar to Americans in other industries and careers:

  • Lack of Time
  • Lack of Resources (Who Can Help Me? What Do I Do?)
  • And Putting Others Needs First (Paying for kids’ college before funding your own retirement)

But perhaps one of the most telling reasons nurses aren’t getting their ducks in a row is because they assume they’ll be working into retirement age.

Nurses reported they planned on working full-time past 66, while others stated they would work part-time.2

So, instead of imagining tropical vacations and sleeping in, most nurses polled don’t envision retirement as anything more than an abstract concept. Something other people do.

The thing is, nursing is not easy work. It requires physical and mental stamina. As nurses age and younger nurses come on the scene, it will be harder to compete in terms of ability and pay. At some point, nurses must think about their financial future – even if they do hang in the workforce longer than others.

Why Wait?

Waiting to save money for retirement is like waiting to jump on a life boat from a sinking ship. The longer you wait, the further and harder you have to swim to get to the boat. Don’t make it that difficult.

Make a commitment today that you will do these three things:

  • Figure out a good age to retire – at lease within a 5-year range (66-71)
  • Get your budget in order – what are you making vs. spending
  • Meet with a financial advisor – find one who comes with good recommendations and is a fiduciary

You can’t take care of others, if you don’t take care of yourself! Start today, you won’t regret it.

 

 

1http://www.epi.org/publication/retirement-in-america/#charts
2https://www.wiserwomen.org/images/imagefiles/wiserNurseInvestorRptMay2012finalRev.pdf