• Refrain from Tapping Your Retirement Funds

    Resist the temptation. Your future self will thank you.

     

    Provided by MidAmerica Financial Resources

     

     

    Retirement accounts are not bank accounts. Nor should they be treated as such. When retirement funds are drawn down, they impede the progress of retirement planning, even if the money is later restored. 

     

    In a financial crush, a retirement account may seem like a great source of funds. It is often much larger than a savings account; it is technically not a liquid asset, but it can easily be mistaken for one.

     

    The central problem is this: when you take a loan or an early distribution from an IRA or a workplace retirement plan, you are borrowing from your future self. In fact, you may effectively be borrowing more money from your future than you think. Even if you put every dollar you take out back into the account, you are robbing those dollars you removed of the tax-deferred growth and compounding they could have realized while invested.

     

    An early withdrawal will commonly come with a 10% penalty. The Internal Revenue Service does not want you to cash out your retirement account prior to age 59½, so it puts an additional tax on withdrawals from traditional IRAs and employer-sponsored retirement plans that occur before then. (This applies even to withdrawals defined as “hardship distributions,” where the account holder has demonstrated a severe financial dilemma and a lack of other financial sources to address the problem.)1,2

     

    The money exiting the plan is considered a distribution of ordinary, taxable income. So, you will pay regular income tax on the money you take out, plus a penalty equal to 10% of the amount withdrawn.1,3

     

    In the case of a workplace retirement plan, you will not even receive 100% of what you take out. The plan must withhold 20% of the withdrawn funds from you to cover income taxes.2

            

    There is one asterisk worth noting here. The I.R.S. will let you withdraw your contributions to a Roth IRA at any point during your life, tax free and penalty free. Roth IRA earnings, however, are a different story – if you begin to withdraw those earnings before you reach age 59½ and have owned the Roth IRA for at least five years, then regular income taxes and the 10% penalty apply to the distribution.1

     

    Loans come with their own set of issues. Most employer-sponsored retirement plans allow them once you are vested. You can usually withdraw up to $50,000 or 50% of your account balance, whichever is less; the term of repayment is typically five years.1,3

     

    All that may appear very convenient, but you are still borrowing money that could be growing and compounding in the account – with taxes deferred, no less. Moreover, the loan comes with interest and cuts into your take-home pay.3

     

    In some cases, you may feel like you have no choice but to borrow from your employee retirement plan: your back is against the wall financially due to hospital bills, high-interest debts, or other pressures; you lack other financial means to address these pressures; and you certainly do not want to turn to a predatory lender.

     

    If you do take a loan from your workplace retirement plan account, remember two things. One, the loan should not be so large that your monthly household debt approaches 35-40% of your gross income. Two, you should avoid taking a loan if it appears you may leave the company in the coming months. If you quit or are fired, you may need to repay the whole loan balance in as little as 60 days. Any money you fail to repay will be considered a distribution of taxable income to you otherwise.3

     

    All this underscores the need to build an emergency fund. If you have adequate cash on hand for sudden financial crises, you can refrain from taking what should be thought of as a withdrawal or loan of last resort.

     

    MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@lpl.com

     

    This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

     

       Securities and advisory services offered through LPL Financial, a Registered Investment Adviser, Member FINRA/SIPC.
    MidAmerica Financial Resources and Malan Financial Group are separate and unrelated companies to LPL.

     

    Citations.

    1 - tinyurl.com/ya42no9v [9/13/17]

    2 - forbes.com/sites/financialfinesse/2017/03/16/the-401k-distribution-opportunity-you-need-to-think-twice-about/ [3/16/17]

    3 - cnbc.com/2017/04/13/never-pull-money-from-your-401k--except-in-these-3-cases.html [4/13/17]

     

     

  • The Republican Tax Reform Plan

     

    What is in it? What could its changes mean for you, if they become law?

     

    Provided by MidAmerica Financial Resources

     

    Major changes may be ahead for federal tax law. At the start of November, House Republicans rolled out their plan for sweeping tax reforms. Negotiations may greatly alter the content of the bill, but here are the proposed adjustments, and who may and may not benefit from them if they become law.

       

    The corporate tax rate would fall from 35% to 20%. Wall Street would cheer this development, perhaps with a significant rally. Sole proprietorships, partnerships, and S corporations would also see their top tax rate drop to 25% (although W-2 wages for business owners who invest in these pass-through entities would still be taxed at the owner’s marginal tax rate).1,2

     

    The estate tax and Alternative Minimum Tax would be eliminated. The AMT would die immediately, saving more than 5 million high-earning taxpayers from an annual bother. Death taxes would sunset within six years, and in the interim, the estate tax exemption would be doubled, leaving the individual exemption at about $11 million. This would be a boon for many highly successful people and their heirs.2

     

    Personal exemptions would go away, but the standard deduction would nearly double. The loss of the personal income tax exemption (currently $4,050 per individual claimed) would be countered by standard deductions of $12,000 for individuals and $24,000 for married couples. This could lessen the tax burden for many middle-class households. On the downside, the larger standard deduction might reduce the incentive to donate to charity.1,2

     

    Only four income tax brackets would exist. While the top marginal tax rate would remain at 39.6%, the other brackets would be set at 12%, 25%, and 35%. Individuals earning $45,000 or less and spouses with combined earnings of $90,000 or less would fall into the 12% bracket. Households earning less than $260,000 would be in the 25% bracket. The individual threshold for the 39.6% bracket would be moved up to $501,000 from the current $418,401; it would apply to couples who earn more than $1 million.3

      

    Some state and local tax deductions might vanish. Taxpayers who face higher state income tax rates – such as those living in New York, California, and New Jersey – could lose a big tax break here. The reform bill’s author, House Ways & Means Committee Chair Kevin Brady (R-TX), says that a new revision to the bill would at least let homeowners deduct state and local property taxes up to a $10,000 cap.3

      

    Speaking of caps, the mortgage interest deduction would be halved to $500,000. Real estate investors, developers, and agents are unhappy with this idea, as the current $1 million mortgage interest deduction has helped to spur home buying.1

     

    Some key itemized credits and deductions would disappear. Among those the bill would do away with: the medical expense deduction, the moving deduction, the student loan interest deduction, the deduction on alimony payments, the electric vehicle deduction, and the tax credit drug manufacturers rely on as they undertake clinical trials. Retirees, divorcees, college grads, and pharmaceutical companies could see some financial negatives.1,2

     

    Private college endowments would be taxed. With the aim of generating $3 billion in revenue over the next ten years, the bill would impose a 1.4% federal excise tax on private colleges and universities with 500 or more students and assets equivalent to or greater than $100,000 per full-time student.1

     

    The Child Tax Credit would grow. Families eligible to claim the credit would see it rise to $1,600 from the current $1,000.3

     

    Hardship withdrawals from workplace retirement plans could become larger. Currently, plan participants who take hardship withdrawals are only allowed to withdraw their contributions, not both their contributions and earnings. The new reform bill would lift that restriction. In addition, a worker with an outstanding loan from a workplace retirement plan who loses his or her job would have until April 15 of the following year to repay the loan balance, as opposed to the current 60 days.4

     

    MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@lpl.com

        

    This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.   

         

    Citations.

    1 - nytimes.com/2017/11/02/us/politics/republican-tax-plan-winners-losers.html [11/2/17]

    2 - kiplinger.com/article/taxes/T055-C032-S014-3-game-changers-for-investors-in-house-tax-plan.html [11/3/17]

    3 - businessinsider.com/trump-gop-tax-reform-plan-bill-text-details-rate-2017-10 [11/2/17]

    4 - chicagotribune.com/business/ct-biz-gop-tax-bill-401k-changes-20171103-story.html [11/3/17]