IRA Withdrawals that Escape the 10% Tax Penalty

The reason withdrawals from an Traditional Individual Retirement Account (IRA) prior to age 59½ are generally subject to a 10% tax penalty is that policymakers wanted to create a disincentive to use these savings for anything other than retirement.¹

Yet, policymakers also recognize that life can present more pressing circumstances that require access to these savings. In appreciation of this, the list of withdrawals that may be taken from a Traditional IRA without incurring a 10% early withdrawal penalty has grown over the years.

Penalty-Free Withdrawals

Outlined below are the circumstances under which individuals may withdraw from an IRA prior to age 59½, without a tax penalty. Ordinary income tax, however, generally is due on such distributions.

1. Death — If you die prior to age 59½, the beneficiary(ies) of your IRA may withdraw the assets without penalty. However, if your beneficiary decides to roll it over into his or her IRA, he or she will forfeit this exception.²
2. Disability — Disability is defined as being unable to engage in any gainful employment because of a mental or physical disability, as determined by a physician.³
3. Substantially Equal Periodic Payments — You are permitted to take a series of substantially equal periodic payments and avoid the tax penalty, provided they continue until you turn 59½ or for five years, whichever is later. The calculation of such payments is complicated, and individuals should consider speaking with a qualified tax professional.³
4. Home Purchase — You may take up to $10,000 toward the purchase of your first home. (According to the Internal Revenue Service, you also qualify if you have not owned a home in the last two years). This is a lifetime limit.⁴
5. Unreimbursed Medical Expenses — This exception covers medical expenses in excess of 7.5% of your adjusted gross income.⁴
6. Medical Insurance — This permits the unemployed to pay for medical insurance if they meet specific criteria.
7. Higher Education Expenses — Funds may be used to cover higher education expenses for you, your spouse, children or grandchildren. Only certain institutions and associated expenses are permitted.
8. IRS Levy — Funds may be used to pay an IRS levy.
9. Active Duty Call-Up — Funds may be used by reservists called up after 9/11/01, and whose withdrawals meet the definition of qualified reservist distributions.

Filing Final Tax Returns for the Deceased

When a family member passes away, there are many decisions that need to be made and many emotions to handle. The last thing anyone thinks about is taxes.

Unfortunately, even the deceased can’t escape taxation. If the departed family member earned taxable income during the year in which they died, then federal taxes may be owed. An executor or a survivor must, therefore, file a final federal income tax return (Form 1040).¹

Similarly, if the deceased individual had a sizable estate or assets that might generate income in the future, the estate may owe taxes. Federal estate tax forms pertaining to the decedent’s estate may need to be filed (Form 1041, Form 706).¹

The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult a professional with tax expertise if you find yourself in this situation.

Income Taxes

The Internal Revenue Service generally gives you until April 15 of the year following the taxpayer’s death to file a final 1040 form. If the deceased was married, a surviving spouse has the option to file a final joint federal tax return for the last year in which the deceased lived.²

If you file the return online, the IRS provides instructions on all of this. If you are filing a paper return, you must write “Deceased,” the decedent’s name, and the date of death at the top of the 1040 form. An appointed personal representative and/or surviving spouse must sign this return per IRS guidelines. If a refund is due, you may need to file a Form 1310 (Statement of Person Claiming Refund Due a Deceased Taxpayer).^2,3

Estate Taxes

If an estate is large enough, Form 706 (the United States Estate Tax Return) is due to the IRS within nine months of the death of the deceased, with a 6-month extension permitted. The individual federal estate tax exemption is $11.7 million for 2021, so an estate smaller than $11.7 million may not be faced with estate taxes unless the deceased individual made substantial monetary gifts before their passing.^4,5

When the decedent’s estate has an executor or administrator (in IRS terminology, an “appointed personal representative”), they must sign the return for the decedent. For a joint return, the spouse must also sign. Alternately, a survivor of the deceased can file the return.²

If an estate generates more than $600 in gross yearly income within 12 months of that taxpayer’s death, it will also be necessary to file Form 1041 (U.S. Income Tax Return for Estates and Trusts), usually by April 15 of the year after the year in which the individual died. Should 100% of the income-generating assets of the deceased be exempt from probate, the need to file Form 1041 is removed. Estates required to file Form 1041 should consult a tax professional.¹

Lastly, there are some cases where expenses paid before death can be deductible. Under certain circumstances, part of the cost of treating a final illness may be deducted on the deceased’s final federal tax return.¹

You Are Not Alone

A death in the family can take a heavy toll. In the event of such a tragedy, the last thing you may want to do is deal with the related financial issues. Contact us – we are here to help.

Keeping It in Perspective

It’s easy to get excited reading the news. With all of the storm and stress of the last few years, it’s only natural to react to each ping of our phone’s news apps with a deep sigh and a cynical “what now?”

The truth is, there’s always good news and bad news if you dig deep enough into the paper. For every international crisis, there’s a medical breakthrough. Each victory has a counteracting problem when you step back and take a look at the big picture. Does this mean that we should just shut off the news and let things happen? No, it’s good to stay informed. Keeping all of that information in perspective, though, can be difficult. If you aren’t careful, it can lead to emotional or rash decision-making.

Your financial strategy, for instance, has been developed with the “big picture” in mind. Many things can happen in that time, and our strategy gives room for those events to rise, take place, and then fall into the rearview.

Keeping it all in perspective can be tough at times, but this is one of the many reasons you aren’t going it alone. When times seem turbulent, it’s good to have someone to reach out to who can help you keep that big picture in mind. Give me a call if you’re feeling that turbulence; I’d be happy to check in with you and help you keep your focus.

Pullbacks, Corrections, and Bear Markets

When the market drops, some investors lose perspective that downtrends and uptrends are part of the investing cycle. When stock prices break lower, it’s a good time to review common terms that are used to describe the market’s downward momentum.

Pullbacks.

A pullback represents the mildest form of a selloff in the markets. You might hear an investor or trader refer to a dip of 5-10% after a peak as a “pullback.”¹

Corrections.

The next degree in severity is a “correction.” If a market or markets retreat 10% to 20% after a peak, you’re in correction territory. At this point, you’re likely on guard for the next tier.²

Bear Market.

In a bear market, the decline is 20% or more since the last peak.²

All of this is normal.

“Pullbacks, corrections, and bear markets are a part of the investing cycle.”

When stock prices are trending lower, some investors can second-guess their risk tolerance. But periods of market volatility can be the worst times to consider portfolio decisions.

Pullbacks and corrections are relatively common and represent something that any investor may see from time to time in their financial life, often several times over the course of a decade. Bear markets are much rarer. In fact, between April 1947 and September 2021, there have only been 14 bear markets.³

A retirement strategy formed with a financial professional has market volatility factored in. As you continue your relationship with that professional, they will also be at your side to make any adjustments and help you make any necessary decisions along the way. Their goal is to help you pursue your goals.

Questions About the Conflict in Ukraine

It’s been a difficult 24 hours, with many of us waking up to learn about the terrible events in Ukraine. You’ve likely heard about the possible second-order effects, like a skittish stock market, potential energy supply constriction, and the threat of continuing supply chain disruptions.

No one knows how long the current crisis will last or how it may further rattle an already volatile market. While we are no foreign policy experts, we wanted to reach out to let you know we are keeping a close eye on the latest news as it unfolds, with a specific focus on the ways it may impact our clients.

If you’d like to follow along with us, we found the ABC News live blog insightful and well-sourced. Bloomberg also has excellent reporting on how the conflict may further impact oil and other commodity prices.

Please don’t hesitate to join us for our Live Q&A Zoom event, with any questions or concerns you might have. Dr. Jason Van Duyn and the AQuest Advisors look forward to answering your question. In the meantime, our thoughts and prayers are with the people of Ukraine and anyone impacted by the crisis.

Join us Monday, Feb. 28th 4:30pm
Zoom Question & Answer Session

Wall Street’s main benchmarks tumbled at Thursday’s open after Russian President Vladimir Putin launched a military invasion of Ukraine overnight.

This fuels uncertainty in the way we handle our finances. That is why we are inviting you to attend a brief, 20-minute Live Question & Answer zoom session.

This meeting will focus exclusively on answering your questions.

Click here to REGISTER

Risks of Cryptocurrency

Like many Americans, you probably saw at least a few Super Bowl advertisements for the cryptocurrency industry last weekend. And if you’ve been paying attention to the news, there’s no question you’ve heard of someone creating a cryptocurrency wallet. With all the excitement, you may even be tempted to invest in, or mine, cryptocurrency yourself.

But before you dive in, you should know that cryptocurrency is inherently risky.

Unlike banks and brokerages, there’s no regulatory body watching over the crypto market, which reports to the state and federal government. In addition, crypto prices are heavily susceptible to sentiment. As sentiment changes, prices shift — sometimes drastically. In other words, cryptocurrency is driven mainly by the hope that someone will purchase it for more in the future than the initial investment.

At the same time, many cryptocurrency exchanges have become targets for criminals. For example, did you hear about what the Justice Department has called its “largest financial seizure ever?” A couple was recently accused of conspiring to launder billions of dollars worth of bitcoin stolen during a 2016 hack, which targeted a well-known virtual cryptocurrency exchange.¹

It’s natural to be excited about a new opportunity, especially one with as much media buzz as cryptocurrency continues to generate. But before you get started, it’s crucial to research and understand the risks. We’re always here to help.

Ukraine, Inflation and the Fed

There is plenty to worry about these days.

Top of mind is the escalating tensions between Russia and Ukraine. Closer to home, high inflation persists, and the Fed is preparing to tighten monetary policy.

And while Covid is moving away from the front page, the markets have a lingering worry that another variant could emerge. Before long, the midterm elections will begin making headlines as well, as candidates take positions.

Add it all up, and you see the S&P 500 teetering on correction territory as some investors ponder the best way to ride out the next few months.

If you’re worried about the financial markets, please reach out. I understand that current events can be a bit overwhelming, and you may feel the need to be proactive. But remember, we created your financial strategy based on your goals, time horizon, and risk tolerance, and we anticipated there would be unsettling events along the way.

How to Appeal Your Property Taxes

Between 30 percent and 60 percent of taxable property has an inflated assessment, which may lead to higher property tax bills. Moreover, typically fewer than 5 percent of taxpayers dispute their assessment.¹

For homeowners who think their local government may have assessed their property’s value too high, there are ways to appeal and potentially win a lower assessment, which may save hundreds or even thousands of dollars annually in future taxes.²

The procedures and requirements for challenging the assessed value of your property will differ by state, but you should consider a number of general factors.

Determine Whether an Appeal Is Justified

Your opinion of the fairness and accuracy of your property assessment is not enough. You will need to gather facts to support your claim. One way to do that is to see how your home compares to similar homes in your neighborhood.

Check to see if there are any obvious errors (e.g., is the square footage incorrect?). If you have found an outright error, you may be able to simply bring it to the assessor’s attention and get it corrected.

Consider the Cost-Benefit Ratio

Appealing your assessment may cost you money, depending on the complexity of the process and whether you choose to use professional resources. You are the ultimate judge of weighing the costs related to some uncertain financial reward, but know the cost-benefit before you start. For instance, you may not want to spend $1,000 to save $200 per year.

Use an Independent Appraiser

Your appeal will have less credence if the market evaluation is made by a local real estate agent. A comparative appraisal will carry considerably more weight when it is performed by a credible, third-party expert.

Follow All the Rules

Appeals have precise deadlines and procedures. You need to meet them; otherwise you run the risk of losing out on the opportunity to have your appeal heard for another year. Call your local officials or visit the relevant website to familiarize yourself with the appeal process requirements.

A Decision Not Made Is Still a Decision

Whether through inertia or trepidation, investors who put off important investment decisions might consider the admonition offered by motivational speaker Brian Tracy, “Almost any decision is better than no decision at all.”¹

This investment inaction is played out in many ways, often silently, invisibly and with potential consequence to an individual’s future financial security.

Let’s review some of the forms this takes.

Your 401(k) Plan

The worst indecision may be the failure to enroll. Not only do nonparticipants sacrifice one of the best ways to save for their eventual retirement, but they also forfeit the money that any employer matching contributions represents. Not participating holds the potential to be one of the most costly indecisions one can make.

The other way individuals let indecision get the best of them is by not selecting the investments for the contributions they make to the 401(k) plan. When a participant fails to make an investment selection, the plan may have provisions for automatically investing that money. And that investment selection may not be consistent with the individual’s time horizon, risk tolerance, and goals.

Under the SECURE Act, in most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 72. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10 percent federal income tax penalty.

Non-Retirement Plan Investments

For homeowners, “stuff” just seems to accumulate over time. The same may be true for investors. Some buy investments based on articles they have read or based on the recommendations of a family member. Others may have investments held in a previous employer’s 401(k) plan. 

Over time, we can end up with a collection of investments that may have no connection to our investment objectives. Because of the dynamics of the markets, an investment that may have once made good sense at one time may no longer be advantageous today.

By not periodically reviewing what we own, which would allow us to cull inappropriate investments – or even determining if the portfolio reflects our current investment objectives – we are making a default decision to own investments that may be inappropriate.

Whatever your situation, your retirement investments require careful attention and may benefit from deliberate, thoughtful decision-making. Your retired self will be grateful that you invested the time … today.

Alternative Investments – Going Mainstream

Recent years have witnessed the mainstreaming of alternative investments for certain accredited investors. In fact, alternative investments are expected to grow from $13.9 trillion in 2020 to $21.1 trillion in 2025.^1,2

The impetus behind this projected growth is the belief that alternative investments offer the potential to enhance the risk/reward characteristics of a traditionally diversified portfolio.³

“Alternative investments” is an umbrella term for a disparate range of investment strategies and assets that might be best defined as investments that use a different approach from traditional instruments.

While today’s portfolios may benefit from some diversification to alternative investments, it should be emphasized that the risk, return, and market correlations will vary widely among them.³ Consequently, individuals need to consider what their objective is for adding alternative investments and select the appropriate strategy to pursue their needs.

Types of Alternative Investments

Private Equity — Seeks to participate in the growth of private companies. Private equity is an illiquid asset class that seeks long-term appreciation away from public markets.

Hedge Funds — Investments that have broad flexibility in the types of strategies they can employ to follow their stated investment objectives.

Commodity Pools — Enterprises that attract funds from people who are looking for the pool managers to engage in commodity-related trades.

Alternative investments are geared to “accredited” or “qualified” investors who are considered high-net-worth individuals with investment experience, and these investments usually have high minimum investment requirements. Some investment companies have structured mutual funds after alternative investments, providing individuals with access to the investment strategy while offering daily liquidity at lower minimum investment requirements.

Mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.