Question:
Should I withdraw money from my IRA to pay for my grandchild’s college tuition?
Answer:
We simply believe no. While both the traditional IRA and Roth IRA allow you to withdraw money for qualified higher education expenses before age 59½ without incurring the federal 10% early withdrawal penalty, we highly recommend that you do not do so.
A withdrawal from your IRA brings potential tax concerns. The amount you withdraw will be will be considered taxable income the year you withdraw it. This could be enough to put you in a higher tax bracket.
Even if your retirement is years away, you’ll need to consider the impact of the withdrawal on your retirement plans. We believe most people underestimate the cost of college tuition. A $5,000 withdrawal may only cover one year, depending on the school. A large withdrawal close to your retirement could cripple your plans.
Paying for your grandchild’s college is a wonderful idea if you can afford to do this; however, we recommend you use funds outside of your IRA. You may also want to investigate alternatives, such as, financial aid, grants and federal or personal loans.
Question:
I was just hired by a relatively large family-run company as a senior executive to reinvigorate management. It’s been run by the same family for five generations. This company has an Age-Weighted Profit-Sharing Plan. I have never heard of this. Can you shed some light on it?
Answer:
An age-weighted profit-sharing plan is a defined contribution profit-sharing plan where contributions are allocated based on the age of plan participants and their compensation. Older participants with fewer years to retirement receive larger allocations, as a percentage of current compensation, to their accounts than younger participants.
Contributions aren’t the only way to make a comparison for nondiscrimination purposes. The IRS permits benefits to be compared, too.
Nondiscrimination rules allow defined contribution plans to be tested either by examining the current dollar contribution made to employees each year, or by converting those contributions into equivalent benefits. This essentially looks at the benefit a particular dollar contribution today would provide at the plan’s normal retirement age using certain actuarial assumptions. These type of plans aim to provide equitable retirement benefits.
Age-weighted plans can be suitable for business owners who are considerably older than their employees. However, today most workers have seven to 10 different employers in the course of their career. An age-weighted plan may not benefit younger employees who are not intending to stay with the company until retirement. The truth is, if it is the “Smith Widget Company” and your name is not Smith, you will likely not spend your career there. For you, we recommend focusing on how much you are earning. As a senior manager, you may want to look into a better retirement plan for the employees.
Question:
Are alimony payments considered taxable income?
Answer:
Alimony is considered taxable income to the one who receives it, and it is tax deductible to the one who pays it. To be considered alimony by the IRS, the payments must meet several requirements including that all payments must be made in cash, check, or money order; a written court order or separation agreement must exist regarding the alimony, and the order must not designate the payment as being as child support or a real estate settlement. Additionally, the couple generally cannot live in the same household while alimony is being paid.
At Henssler Financial we believe you should Live Ready, and that includes understanding how your decisions affect your financial future. If you have questions regarding your situation, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
