The Basics

Your Individual Retirement Account (IRA) is a savings account where you keep stocks, bonds, mutual funds, and other assets. There are several types of IRAs: Traditional IRA, Rollover IRA, Simple IRA, SEP-IRA, and Roth IRA. When you opened your IRA, you received great tax benefits and invested in your future: a secure, enjoyable retirement. While you will ideally wait until you’re at least 59 ½ years old to withdraw from your IRA, there may be situations where you need to withdraw early. That said, a penalty may apply.

The Penalty

If you withdraw early from your IRA before you’re 59 ½, you may have to pay a 10 percent tax penalty. Congress put this penalty in place to encourage individuals to save their investment capital for the future, rather than spending it on short-term problems. The good news is that there are exceptions to this rule if you must make an early withdrawal from your IRA.

The Exceptions

That 10 percent tax penalty sounds scary, but it doesn’t have to be. You might even avoid that fee for early withdrawal from your IRA if you’re:

1. Buying a Home for the First Time

If you’re a qualified, first-time homebuyer, that 10 percent tax penalty is waived on up to $10,000 of IRA withdrawals. You can use these funds to buy, build, or remodel a first home for yourself, your spouse, a child or grandchild, or a parent or grandparent. You can see if you meet the IRS definition of a first-time home buyer here.

2. Covering Higher Education Costs

If you’re paying for yourself, your spouse, your kids, or your grandchildren to receive higher education, that money doesn’t grow on trees. But, it has been growing in your retirement account, and an early withdrawal from your IRA will not be penalized if you’re doing so to fund schooling. You can thank the Higher Education Act of 1965 for this exception that allows IRA distributions to cover certain expenses for colleges, universities, and vocational schools.

3. Suddenly and Permanently Disabled

If you become permanently disabled—either physically or mentally—and are no longer capable of working to support yourself, you may make a penalty-free early withdrawal from your IRA. Your doctor must certify that you’re no longer able to work and that your disability will either last a significant amount of time or eventually lead to your death. And, if you do unfortunately pass away before age 59 ½, your beneficiaries can inherit your retirement funds without penalty.

4. Inheriting IRA Assets

If you’re the beneficiary of a parent, grandparent, or other non-spouse who has passed away, you won’t have to pay the tax penalty for early withdrawal from your benefactor’s IRA. There are a few more technicalities when it comes to inheriting an IRA from your deceased spouse. If you treat your inherited IRA as your own, then any amount you withdraw will be subject to the tax penalty. However, if you title this as an “Inherited IRA,” then you will have to pay the 10 percent tax penalty.

5. Going into Active Duty

If you are a military reserve who is called to active duty, you will not be subject to the tax penalty for early withdrawal from your IRA. In this case, your withdrawal is a “qualified reservist distribution” when you meet the following requirements:

• You were called to active duty before September 11, 2001;
• You were called to active duty for a period longer than 179 days, or for an indefinite period of time; and
• The distribution was made after the date you were called to active duty and before the period of active duty ended.

6. Paying Your Medical Insurance Premium

If you lose your job or suddenly must pay your own medical insurance premiums, you can make an early withdrawal from your IRA without paying the tax penalty. Keep in mind that this exception only applies if you’ve been on unemployment for more than 12 weeks. Also, if you become re-employed, you cannot receive your withdrawal more than 60 days after your new employment begins.

7. Paying for Steep Medical Expenses

If you or your children are seriously ill or injured, those medical costs can add up quickly. If they exceed 10 percent of your adjusted gross income, you can make an early withdrawal from your IRA without paying the tax penalty. If you qualify for this exception, make sure that you pay your medical expenses the same calendar year that you are withdrawing those IRA funds.

These exceptions can be confusing, and they might differ depending on which type of IRA you have. That’s why it’s smart to consult with a qualified financial advisor who has your best interests in mind. This will help you understand the ins and outs of early withdrawal from your IRA, giving you peace of mind and security about your financial decisions.

Lorenz Financial Services, LLC is a Lafayette, Indiana fiduciary who offers financial planning and portfolio management services. If you have questions about who we are or our services, please contact us at (765) 532-3295 or email us.

The post What You Need to Know About Early Withdrawal from Your IRA appeared first on Lorenz Financial Services | Lafayette Indiana.

1. Live below your means.

Spend less money than you make. It’s a simple enough philosophy but can be a difficult practice. However, the bottom line is you cannot save for retirement while spending more than your income. Cutting your spending can be as easy as making meals at home or holding off on making impulse purchases. Meeting with a fiduciary is a great way to get advice on how to stop spending and start saving for retirement.

2. Use your employee benefits.

If your employer offers a company retirement plan (401K, 403b, 457, TSP, etc.), take advantage as soon as you’re eligible. Many companies offer a company match in which the employer will match a percentage of your contributions to your retirement account. This is essentially free money, so don’t miss out.

The longer you stay at a company, the more likely you are to receive a pay increase. When your company offers you a pay increase, reserve half to be put into your 401K. You won’t miss money that you never had and you will thank yourself later for using your raise wisely.

3. Pay attention to investment costs.

Do you know the annual expense ratio of the funds you own? Investment costs can add up quickly, and the reality is that loaded mutual funds (mutual funds that require you to pay a sales charge or commission to a broker) do not perform better than no-load funds.

For example, a $25,000 investment could grow into $68,975 after 15 years growing at 7% per year with 2% fees. Meanwhile, a $25,000 investment will grow into $90,438 after 15 years growing at 8.95% per year with 0.05% fees. That’s a huge difference in the money you could be saving for retirement!

4. Prioritize saving for retirement.

There are many costs and expenses that may seem more important than your retirement fund, especially for those who will not be retiring anytime soon. For example, taking care of your child’s college fund may seem more pressing. However, if you have to choose between saving for college and saving for retirement, always choose to save for retirement. You can borrow for college, but you can’t borrow for retirement.

5.  Think long term when investing for retirement.

It can be tempting to pull money out of the stock market whenever the economy fluctuates. Instead, be a long-term stock market investor and view market corrections and bear markets as “buying opportunities” and not as “risk.” Investing for retirement means controlling your emotions when there are short-term fluctuations by using courage and patience.  

6. Put money into a Roth IRA

Lastly, see if you are eligible to maximize your savings in a Roth IRA. Investment growth inside your Roth will be tax free if your investment is open for a minimum of five years.  

If you are married, remember that only one spouse needs to work to be eligible for two Roth IRAs. In 2017, individuals under 50 years old can contribute a maximum of $5,500 per year to their Roth IRA. After turning 50, the maximum increases to $6,500 per year.

Keep increasing your savings for retirement until you are saving at least 15% of your take home pay.

When life gets busy, it’s easy to procrastinate investing for retirement and prioritize other financial obligations. Following these tips will help you prepare for the retirement you have in mind.  

Lorenz Financial Services, LLC is a Lafayette, Indiana fiduciary who offers financial planning and portfolio management services. If you have questions about who we are or our services, please contact us at (765) 532-3295 or email us.

The post Six Tips for Saving and Investing for Retirement appeared first on Lorenz Financial Services | Lafayette Indiana.