Withdrawing Before Age 59 1/2

What happens if I withdraw money from my tax deferred investments before age 59½?

Generally, withdrawing from a tax deferred retirement account before age 59 ½ triggers a 10% federal income tax penalty on top of any other federal income taxes due. However, there are certain situations where you can make early withdrawals from a retirement account and avoid the tax penalty. Before we list the types of distributions, please note that you should check your specific plan to ensure that such withdrawals are allowed.

IRAs and employer sponsored retirement plans have various exceptions though the rules are generally similar.

IRA Exceptions

•          Death of the IRA owner: distribution to your designated beneficiaries after your death (beneficiaries are subject to annual required minimum distributions).
•          Disability: distributions can be made due to a qualifying distribution. 
•          Unreimbursed medical expenses: distributions equal to the amount of your unreimbursed medical expenses that exceed 10% of your gross income in a calendar year.
•          Medical insurance: distributions made to pay for health insurance if you lost your job and are receiving unemployment benefits.
•          Substantially equal periodic payments (SEPPs): Distributions you receive as a series of substantially equal payments over your life expectancy, or the combined life expectancies of you and your beneficiary. You must withdraw funds at least annually based on one of three rather complicated IRS-approved distribution methods. You generally can't change or alter the payments for five years or until you reach age 59½, whichever occurs later. If you do, you'll again wind up having to pay the 10% penalty tax on the taxable portion of all your pre-59½ SEPP distributions (unless another exception applies).
•          Qualified higher education expenses: these distributions can be made for you and/or dependents.
•          First home purchase: this distribution can be up to $10,000 (lifetime limit).
•          Qualified reservice distributions: certain distributions to qualified military called to active duty.

Employer Sponsored Plan Exceptions

• Death of the plan participant: upon your death, your designated beneficiaries may begin taking distributions from your account. Beneficiaries are subject to annual minimum required distributions.
• Disability: distributions made due to your qualifying disability.
• Part of a SEPP program (see above): distributions you receive as a series of substantially equal payments over your life expectancy, or the combined life expectancies of you and your beneficiary. You generally cannot modify the payments for a period of five years or until you reach age 59½, whichever is longer.
• Attainment of age 55: distributions made to you upon separation of service from your employer. The separation must have occurred during or after the calendar year in which you reached the age of 55 (age 50 for qualified public safety employees).
• Qualified Domestic Relations Order (QDRO): payments made to an alternate payee under a QDRO.
• Medical care (see above): distributions equal to the amount of your unreimbursed medical expenses that exceed 10% of your adjusted gross income in a calendar year.
• To reduce excess contributions: distributions made to correct excess contributions you or your employer made to the plan over the allowable amount.
• To reduce excess elective deferrals: distributions made to reduce amounts you deferred over the allowable limit.
• Qualified Reservist Distributions (see above).

To learn more about withdrawing before age 59½ click here, or for personalized attention, feel free to call the office at 201-342-3300. One of our associates will be happy to speak to you. 

Retirement Planning

 How much do I need to save for retirement?

That depends on several factors such as: retirement age, life expectancy, future healthcare needs, lifestyle, social security and inflation. 

For instance, the earlier you retire, the more money you will need. And although we all want to believe that we will retire and 65, that might not be your case. One reason you may retire earlier than planned is because you might develop a disability which may prevent you from working.

There is no one size fits all answer, everything is dependent on the factors of your life. However, once all factors are considered, we recommend you visit an experienced financial adviser to assist you further.

Though it is not intended to replace seeing a financial adviser, we do have a retirement cost calculator on our website here.

Finally, for more factors that can help determine how much you need to save, read our article here.

What are some living benefits to annuities?

In many cases and for an added cost, you can add guarantees regardless of the account value.

For example, adding a guaranteed minimum withdrawal benefit to a variable annuity contract could allow the contract owner to withdraw a fixed percentage (about 5% to 7%) of the premiums paid until 100% of the premiums paid had been withdrawn. This will still be possible even if the underlying investments were to lose money.

Another benefit available is the guaranteed minimum income benefit. When the contract owner is ready to collect retirement income payments, they would be based on a minimum payout. In the event of poor investments minimum payout would still be provided by the company.

Thirdly, a guaranteed minimum accumulation benefit can help ensure that the contract value will not fall below a certain minimum after a specified term. This is usually equal to the premiums made.

If you have questions about annuities or their living benefits, take a look on our articles here and here.

What is an IRA rollover?

If you leave a job, or you retire, you might want to transfer the money you’ve invested in one or more employer sponsored retirement to an individual retirement account (or an IRA). An IRA rollover is an effective way to keep your money accumulating tax deferred.

When using an IRA rollover, you transfer your retirement savings to an account at a private institution of your choice, with the bonus of choosing how to invest the funds. To protect the tax deferred status of your retirement savings, the funds must be deposited within 60 days of withdrawal from an employer’s plan. To avoid potential penalties and a 20% federal income tax withholding from your former employer, you should arrange for a direct, institution to institution transfer.

You are able to roll over assets from an employer-sponsored plan to a traditional IRA or a Roth IRA. Because there are no longer any income limits on Roth IRA conversions, everyone is eligible for a Roth IRA conversion; however, eligibility to contribute to a Roth IRA phases out at higher modified gross income levels. Keep in mind that ordinary income taxes are owed (in the year of the conversion) on all tax-deferred assets converted to a Roth IRA.

An IRA can be fitted to your needs, goals and can incorporate various investment vehicles as opposed to the limited options of many employer-sponsored retirement plans. Additionally, tax deferred retirement savings can later be consolidated.

Over time, IRA rollovers may make it easier to manage your retirement savings by consolidating your holdings in one place. This can help cut down on paperwork and give you greater control over the management of your retirement assets.

Lean more about IRA rollovers on our website here.

To learn more about estate planning or to find out about what options best suit you, please call our office at Federal National Funding, at 201-342-3300. One of our associates will be happy to speak to you and will schedule a free consultation. 

Roth IRA

What is a Roth IRA?

A Roth IRA is one of the many investment vehicles available to investors that aim to save for retirement. One key bonus that Roth IRAs have is that they are tax favored. This means they are not taxable, which is advantageous because you would then get to keep more of your money.

What are other advantages to a Roth IRA?

One advantage of a Roth IRA is that you can continue to make contributions after age 70½ as long as you have earned income. Additionally, you do not have to start mandatory distributions due to age as one has to with Traditional IRAs. However, beneficiaries of Roth IRAs must take mandatory distributions.

Roth IRA withdrawals of contribution can be made at any point for any reason. These are also considered tax free and not subject to the 10% federal income tax penalty typically associated with withdrawals. In order to make a qualified tax-free and penalty-free distribution of earnings, the account must meet the five-year holding requirement and the account holder must be age 59½ or older. If your withdrawals do not meet this requirement, they are taxed as any other withdrawal with some exceptions that include: death, disability, unreimbursed medical expenses in excess of 10% of adjusted gross income, higher-education expenses the purchase of a first home ($10,000 lifetime cap) substantially equal periodic payments, and qualified reservist distributions.

To learn more about Roth IRAs, or to learn how you can qualify, click here. Or for personalized attention, call our office today at 201-342-3300. One of our associates will be happy to speak to you.