Question:
Can I avoid the 10 percent penalty tax for early withdrawals from a traditional IRA?
Answer:
Possibly. In most cases, the IRS imposes a 10 percent penalty tax on the taxable portion of withdrawals made from traditional IRAs prior to reaching age 59½. This penalty can be a major drawback for IRA owners under age 59½ who need money and don’t have other assets to draw on. There are a number of exceptions, however. Depending on your circumstances, you may qualify under one of these exceptions to make a penalty-free IRA withdrawal, although you may still have to pay income tax on all or part of the amount withdrawn.
Premature IRA withdrawals made by a disabled person may be exempt from the penalty. If an IRA owner dies prior to age 59½, distributions paid to you as a beneficiary of the account are not subject to the penalty. If you need supplementary income, you can take IRA distributions as a series of substantially equal payments over your life expectancy or the joint life expectancy of you and your beneficiary. These distributions will avoid the penalty as long as you don’t modify the payments within certain time frames. Subject to limits and conditions, the penalty tax generally will not apply to IRA distributions taken to pay qualifying medical expenses, health insurance premiums while unemployed, higher education costs, and qualified first-time home-buyer expenses (up to $10,000 lifetime from all of your IRAs). It also does not apply to amounts rolled over from one IRA to another (assuming you follow the rules for rollovers), to conversions of traditional IRAs to Roth IRAs, to amounts that the IRS levies from your IRA to cover your tax bill, or to qualified reservist distributions.
Other exceptions may also apply. Moreover, Roth IRAs are subject to special rules of their own.
Question:
Now that my child is in college, am I entitled to any education tax credits?
Answer:
You may be. There are two education tax credits–the American Opportunity credit (formerly the Hope credit) and the Lifetime Learning credit. To claim either credit in a given year, you must list your child as a dependent on your tax return. In addition, you must meet income limits.
For 2014, the maximum American Opportunity credit is available to single filers with a modified adjusted gross income (MAGI) below $80,000 and joint filers with a MAGI below $160,000. A partial credit is available to single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000. For 2014, the maximum Lifetime Learning credit is available to single filers with a MAGI below $54,000 and joint filers with a MAGI below $108,000. A partial credit is available to single filers with a MAGI between $54,000 and $64,000 and joint filers with a MAGI between $108,000 and $128,000.
Now, what credit might you be eligible for? The American Opportunity credit applies to the first four years of undergraduate education and is worth a maximum of $2,500. It is calculated as 100 percent of the first $2,000 of your child’s annual tuition and related expenses, plus 25 percent of the next $2,000 of such expenses. To qualify for the credit, your child must be attending college on at least a half-time basis.
The Lifetime Learning credit is worth a maximum of $2,000 per year. It is calculated as 20 percent of the first $10,000 of your child’s annual tuition and related expenses. Unlike the American Opportunity credit, the Lifetime Learning credit is available even if your child is enrolled on less than a half-time basis.
One important rule to know is that you cannot claim both credits in the same year for the same student. As a result, you will need to determine which credit offers you the most benefit in a given year. In this analysis, there is an important distinction between the two credits. The American Opportunity credit can be taken for more than one child in a given year, provided each child qualifies independently. For example, if you have two children in college, one a freshman and the other a sophomore, you can take a $5,000 credit on your tax return. By contrast, the Lifetime Learning credit is limited to $2,000 per tax return, even if you have multiple children who would qualify independently in the same year.
Question:
I have the means, but I don’t know if I want to retire early—and I mean early as in I’m a spry 57 years young. From your perspective, do you talk about the pros and cons of an early retirement?
Answer:
If you choose to do so, you are in good company. A 2014 TIAA-CREF survey found that 37% of Americans plan to retire before age 65. Likewise, a 2014 Gallup survey, the average age at which today’s retirees report they retired is a relatively early 62.
Let’s look at some of the pros and cons.
Pros: An early retirement may be good for your health if you are in a high-stress job. It may be beneficial to take time away from the high demands of your work. Retiring early may also provide you the time to travel while your health is good. Taking leave from a full-time job may allow you to explore a new hobby or even start a new career in a different field.
The cons to an early retirement: It can be bad for your health if you develop sedentary habits. Studies have shown those who became less physically active saw their health decline. Your Social Security payments could be smaller as you may have less years earning your maximum pay. Likewise, if you begin receiving your benefits early, your benefits can be up to 30% less than what you’d be eligible for if you wait until full retirement age to begin collecting. Finally, you’ll need to consider that your money may need to last you longer. If you live to 90, you could be spending nearly 30 years in retirement. Before you plan your farewell party, we recommend knowing what you want to get out of your retirement years.
If you have questions regarding your investments the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. 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.
