Most people know that if they take money out of an IRA before turning age 591/2, they have to pay a 10% penalty tax on the money. But did you know that there are actually some exceptions to the tax code? If you follow them to the tee, you can pull money out of your retirement account and avoid the 10% penalty tax. Here’s how;

If you have a short-term need for money, you can use the 60 day roll-over rule. If you pull money out of an IRA and redeposit the money within 60 days, the money isn’t considered taxable income and don’t have the 10% penalty tax. You can only do this one time every 12 months, so you need to keep good records to make sure you don’t take more than 1 distribution in any 12 month time period.

If you have money in an employer sponsored retirement plan like a 401k or 403b, you can take your money out after age 55 without incurring a penalty tax. Here’s how;

You have to separate from service with that company after you turn 55, and then take your distribution in order to avoid the 10% penalty tax. If you leave the company before your actual 55th birthday, as long as you turn 55 within that same calendar year, the 10% penalty will not apply, because you’ve turned 55 the year in which you separated service.

But what if you don’t have money in an employer retirement plan and/or you’re not yet 55 and you want to have access to your money and will need it longer than 60 days?

Then you could tax advantage of section 72t distributions. It allows you to set up an IRA account to take what the IRS calls a — series of substantially equal periodic payments — those payments will then avoid the 10% penalty tax.

Payments need to run for at least 5 years or until you turn 59 ½ (whichever time period is longer). Just be warned — the penalty if you don’t follow these rules is severe. If you violate the rule, all the prior years distributions are subject to the 10% penalty tax – in addition to the regular income tax you will have already paid on the distributions.

Sometimes, folks will start a 72t payment plan, and then they come into more money/income and wind up with taxable income that’s higher than what they had originally planned for. Then it becomes a numbers-crunching situation. Do you stop the payments and pay the penalty tax or do you continue the payments? Depending on your circumstances, it may make sense to terminate the 72t payment schedule.

Whenever possible, we encourage folks not to utilize a 72t payment schedule. You have to ensure that you maintain the integrity of the payments to avoid paying the penalty tax down the road, and to a degree you limit some of your flexibility. But under the right set of circumstances, a 72t plan can be a viable planning strategy.

Note: Please keep in mind that this article is for informational purposes only and should not to be relied upon as advice. It is merely a reminder that there are many choices you have available to you, and that planning is the only way to find the right answers for your situation! As with any financial issues, make sure you get the right information before making a decision! If you have any questions, we’ll be glad to help you!

Most people think that as an employee participating in their company’s 401k plan, that there are no costs to them for their account. Some of the costs are paid by the employer, but some are also paid by the employee, they just don’t ‘see the costs’ deducted from their account!
401K retirement plans are sold by different types of vendors. Sometimes it’s an insurance company, sometimes a discount brokerage firm (i.e. Fidelity, Schwab, Vanguard etc).

Typically, the larger the business, the lower each participant’s costs will be – so if you work for a company that has thousands of employees, on a per-person basis your costs are going to be lower than, say, somebody working for a company that has 5 employees.

A lot of times small business owners get involved with offering employee benefits without realizing the costs that are involved. The insurance companies are notorious for being more expensive in these cases. And, wouldn’t you know it, they have been the predominant 401k providers in the small business community, simply because a lot of the larger discount brokerage firms felt providing 401ks to small businesses wasn’t cost effective.

The good news is, this is changing. The bad news is that a lot of small businesses have 401k products they bought years ago that may not be the most cost effective solution today. So whether you’re an employee or an employer, you should take the time to look at what’s going on in your plans just to make sure that you are getting the most bang for your buck.

What typically happens with insurance companies is that they wrap their retirement plans in with an annuity product. From an investment perspective, annuities are expensive because they include an insurance element and insurance costs money. Typically those costs can run somewhere between 2 and 3% of plan assets. So if your 401k balance is $100,000, you’re paying around $3,000 per year! For an account most people think is free.

Years ago, plan charges were basically covered by the company that offered the plan. The company would pay the fee, and the participants paid a portion of that fee through the expenses passed on through their investments. But if you take a closer look at the mutual funds within your plan, sometimes, depending on the plan you are involved with, you can be surprised by what you find.

Employers are being sold 401K plans and being told that there are no admin or contract charges, but those fees are being pushed out to the investments themselves.

So what should you do? If you’re an employee of a small business, ask the owner what your total 401k fees are and how they compare to other options/choices that are available. It may trigger something in your employer, and they may decide it’s time to take a closer look.

I am a financial expert. People turn to me for advice. But I will be the first to tell you I certainly have no way of knowing what’s next in terms of where the market is headed in the near future.

And I want to remind you to avoid anyone who says or thinks they do.
Everybody’s got an opinion. Everybody can back it up with all kinds of research. But at the end of the day, remember that if somebody really knew what the heck was going on, we’d all be lined up outside their door!

And we all know that just doesn’t exist. So we’ll continue to follow our buy and sell system, which is as unemotional as possible. And we’re going to let that be our guiding light in today’s choppy cloudy economic environment.

Sure, there are all kinds of so-called experts and talking heads and researchers and analysts with their own opinions on the economy and the market.

Back in 2005, a well-known investment banking company by the name of Lehman Brothers (and I think we all know where they’re at today) gave their most pessimistic, negative outlook on housing. Their forecast was three years of – 5% drops in value. In other words, values would drop – 5% a year for three years, and then resume normal appreciation every year thereafter.

Well, we all know what happened to the housing market — and we only wish it would have been that bad! But bad forecasting is not limited to Lehman. On the subject of housing prices, in 2004, Allen Greenspan was quoted saying that local economies could experience speculative price imbalances, but on a national basis that would be highly unlikely. In June of 2005, he reassured the world that if home prices declined, this likely would not have substantial implications. And in October 2006, back when people were bidding on homes and flipping the contracts within a couple of days without even closing, his comments were basically that housing prices were likely to be lower than the year before, but the worst was probably behind us. That was 2006, and we all know what happened to the housing market since then.

The important fact here is if there was ever a person with access to all the data and all the teams of advisers and researchers, it would be Greenspan, or the Fed chairman. And they still got it wrong!

Which is why our observation over the years has always been that when it seems like everybody wants to get into ‘it’, (gold anyone?) that’s the time to get out. And when everybody wants to get out, (stock market? real estate?) you want to be getting in.

After a rocky period, right now the US economy seems to finally be doing better. Corporate profits the first quarter of 2010 increased to almost $117 billion over the fourth quarter of 2009, when corporate profits were almost $109 billion. We don’t have the results in for the second quarter just yet, but corporate profits certainly seem like they’re starting to increase. Which means things are getting better.

However, everybody we talk to doesn’t feel like things are better.

Why is this happening? Why is it that we see these reports that corporate profits are up by billions and billions of dollars, but on an individual basis it still feels like the economy isn’t recovering? The easiest answer, of course, is that unemployment is still above 9%. Recessions typically last nine months, but this one we’ve just gone through lasted over two years. But the bigger deal could be what some economists are calling a two-tier recovery. Meaning large corporations are feeling a lot of improvement, while small business owners and individuals are not.

There’s a reason for this. Big businesses, I mean really large businesses, have access to capital that small business do not. If a big business needs to borrow money to buy supplies or increase their inventory, they can go to the bond market and access the capital they need. But if you’re a small business owner, you can’t borrow money from the bond market. You’ve got to go to your local bank — and odds are the local bank is still dealing with underwater real estate loans. Some estimates suggest it will take another 18 months for the banks to work through their bad loans and be in a position to really start making credit available to the small business owner.

But there are other reasons the economy is working better for some types of businesses than others. The percentage of big businesses who are being unionized is declining, which gives the larger employers more flexibility as far as hiring and firing and reacting to economic forces than they’ve had in the past. Another reason would be that the savings rate in America is increasing somewhere between the rate of 3% – 6%. And if people are increasing their savings rates, chances are they’re cutting spending in certain areas like going out to dinner, or going to the beauty parlor. On the other hand, if their refrigerator breaks, they’re still going to go out and buy a new one.

So the smaller, service sector businesses are getting hit harder than the larger manufacturers. Exports are helping too. Large corporations get a fair amount of their revenue and profits from exports for international sales. But if you’re a small business, chances are you’re not exporting to any great extent.

So this is why, when we look at the big picture, things that look like they’re improving, and the numbers back that up. While on the local level it still may feel like things haven’t gotten much better at all.

From my experiences over the last couple of decades, I’ve observed that folks tend to have a less stressful and more worry free retirement when they don’t have the burden of debt in their life. Which is why I believe your ultimate goal should be to own your home free and clear at or before retirement. But occasionally, I get challenged on that concept on one of two fronts.

The most common objection to paying off a mortgage that I hear is, “Wow, if I do that I’m going to lose valuable tax deductions.” Well, I just have trouble understanding how that truly makes sense. And here’s what I mean by that. If you think about it, if you pay mortgage interest, for every $1,000 dollars of interest you pay, you’re going to save $150 – $400 on your taxes. Well what would you think of someone, maybe someone like me, suggesting you put $1,000 into an investment knowing that it’s only going to return somewhere between $150 and $400?

Yeah, your taxes might be going up if you don’t have mortgage interest to claim as a deduction. But what a lot of folks leave out of their thought process is net cash flow, because you also are eliminating a mortgage payment.

If you want to see an example, in my book ‘Worry Free Retirement’ I wrote about someone that paid off a $320,000 mortgage. This person obviously lost a huge tax deduction on the mortgage interest — and yet they were ahead of the game every year by almost $10,000 in net cash flow. So to me the “my taxes are going up” argument doesn’t hold water.

The other objection that we’ll hear from time to time is that, “Mortgage money is cheap. Why shouldn’t I just keep my mortgage and keep the money that I would have used to pay the mortgage off invested in a higher returning investment? Then the difference, or the spread, is mine to keep.” For example, if you have a 5% mortgage and earn 8%, you’re making a net 3% on your mortgage balance. In theory, this makes sense. But that theory has some holes in it.

The challenge is, when you have a mortgage, you have guaranteed a fixed interest rate for a fixed period of time to the bank. So if you’re going to play the investment arbitrage game, I think you’ve got to play the game like the bankers do. So you have to get a return that’s at least 2% higher than what your cost of money is — and that return needs to be guaranteed. After all, you’ve guaranteed the rate you’re going to pay the bank!

Here’s the catch — it needs to be guaranteed for the same amount of time that’s remaining on your mortgage. Now, you might be able to find an initial rate guarantee on some other investment, but at the end of the day, the rate is probably not guaranteed for the same length of time remaining on your mortgage. To me, this is an apples-to-apples comparison on the investment arbitrage. Anything less leaves you accepting an increased level of risk…one that your banker isn’t taking, so why should you!

The one exception when it comes to paying off a mortgage is that in a perfect world, you accumulate money outside of a tax deferred account like an IRA or a 401K and you would use that non-IRA, non-retirement money to pay your mortgage off. After all, if you pull money from an IRA or a 401K, that money is going to be taxable as ordinary income to you.
Depending on your age, there could be another 10% penalty tax, which could increase the cost of paying off your mortgage by roughly 20-30%. So if you have enough non-retirement money available, we think it makes sense to seriously consider using some of it to pay off your mortgage and own your home free and clear.

I get a lot of calls and emails from people who aren’t happy with their investments – people who were led in a certain direction by a financial advisor, only to learn later on they didn’t have all the information they needed to choose the best financial advisor for them.

The fact is, there are a lot of people out there calling themselves financial advisors, but sometimes you end up with a wolf in sheep’s clothing. So I’m going to share with you a few things you want to be careful of before you trust someone with your money.

1. Interviewing or talking to just one advisor or one potential advisor. If you’ve never hired a financial advisor before or never worked with a stock broker or anybody in the world of finance, making a decision after talking to just one person could be very harmful to your situation. And the reason I say that is you don’t have a reference of comparison. The first person you meet could be, quite frankly, a complete idiot — but could certainly sound like a great advisor to you simply because you don’t have a comparison to establish a true opinion. So bottom line: you always want to talk to several different advisors so you can sniff out the good ones from the not-so-good ones.

2. Not doing a background or a reference check. I see this all the time. “Gee, I heard this guy on the radio. He must be good.” Or, “He’s quoted in the newspaper all the time. He must be good.” Or even, “He wrote a book. So of course he’s good.” That could be a huge, huge mistake. Right now there’s a multitude of so-called financial, talk-radio, ask the expert shows. What you probably don’t know is that most of these so-called experts are on the air simply because they’re paying the radio station for the air time! The same goes for books. I have written a book, ‘Worry Free Retirement’ – but I actually wrote the book! Did you know there are companies who will make any adfvisor an ‘instant author’? The advisor pays a fee to claim authorship of an already written book! At best, they maybe wrote the preface, but the rest of the content in the book was written by someone else. So don’t get lulled into a false sense of security just because someone “appears” to be an expert.

3. Putting your entire focus on cost. If you hear somebody say, “Buy this investment, you pay nothing. The mutual fund, the annuity, the insurance company pays me, you don’t pay me anything,” my advice to you is to run for the hills. The buyer always pays, there is no free lunch. Where do you think the money comes from for these companies to pay to the advisor?

4. Getting “wowed” by credentials or designations. In the world of financial planners, there are a multitude of designations. Some of which, quite frankly, you get by just paying a couple of hundred bucks, taking an online, open book test and maybe investing a couple of hours. Meaning a fancy credential, doesn’t necessarily qualify them or mean they’ve got what it takes to deliver the goods.

First and foremost look, for a Certified Financial Planner. But that doesn’t mean you stop there, because quite frankly there are some not-so-good Certified Financial Planners. So do your due diligence. You need to find somebody that doesn’t just have the credentials that can deliver the goods, but that you just feel right about. I call it a personal chemistry – but whatever you want to call it, don’t be afraid to shop around. After all, it’s your money…and your lifestyle… that will be affected, for better or worse!

Whether you are collecting social security benefits now or looking forward to that day at some point in the future, there are some options a lot of people just aren’t aware of. They may or may not apply to you — everybody’s situation is different – but they’re good to know about in case one of these strategies might be appropriate for you.

The first strategy is what we call a “Social Security do-over.” Did you know that you could re-start your social benefits? Say you decided to start collecting retirement at age 62. Maybe you didn’t know the benefit increases approximately 8% per year, every year from 62 to 70. Since the difference between retiring at 62 and 70 is about a 32% increase, you might wish you had waited a few years to get that higher benefit.

The good news is, even if you’ve already started taking early Social Security income, Social Security regulations allow you to pay back the Social Security benefits you’ve already received and then re-apply for the new, now higher, benefit.

Of course, the down-side is you have to pay back the prior benefits you’ve received, and it’s not just the net income, it’s the gross income. If Social Security took out Medicare payments or taxes you have to pay back that money too. The upside is you can amend your prior year’s tax return, you can get a little bit of a tax refund.

In order for the do-over to really work, you have to have the money to be able to pay back the prior benefits that you’ve received to start collecting a higher benefit. And of course the biggest downside is if you pass away shortly after starting to receive your new, higher Social Security benefit, you might not have collected enough benefits at the higher rate to cover what you just paid back. It really depends on a lot of different factors to decide whether or not a Social Security do-over makes sense for you.

The next strategy is sometimes called a “file and suspend” strategy. For example, a husband would file for benefits, and his wife would file for spousal benefits, which would be roughly half of the husband’s benefit — assuming the husband is the higher income earner. The husband would then request a suspension of his benefits, if he’s still working, or they don’t need his Social Security income. His wife would continue to receive the spousal benefit while the husband’s benefit continues to grow at 8% a year until he actually started taking payments.

Another strategy is to restrict benefits to spousal benefits only. Again, we’ll use a husband and wife as an example. Let’s say the wife stopped working and is collecting Social Security benefits calculated on her work history. The husband is still working and hasn’t begun collecting Social Security. As long as he is at full retirement age (usually age 66) he can start receiving spousal benefits based on his wife’s Social Security amount. Which means he would get half of his wife’s Social Security income each month, while still allowing his own benefits to grow. Then at age 70, he would stop receiving a spousal benefit and file for his own full Social Security benefits. This scenario would give him 4 years of some Social Security income he would not have had to begin with.

And finally, the fourth strategy. If you’re divorced and were married at least 10 years, you can file for benefits based on your ex-spouse.

These four strategies are a little bit more involved that what we’ve skimmed the surface of here. But for the right set of circumstances, any one of these strategies may be beneficial to you and help increase your retirement income.

Do you have a stock – a favorite company that you are partial to — that you don’t want to get rid of regardless of what all the research or tea leaves might be indicating? We call this stock a legacy holding.

If you have this kind of relationship with a favorite stock or two, then read on for some advice on how to make money – or at least limit your losses!

Our general rule is that if you’ve got a small sum of money and you want to play, that’s fine – as long as you’ll be “okay” if you lose most or all of your investment.

Whenever you have money in a stock, it’s important to look at how much money is involved. If it’s not “life changing money,” even if the stock doubles, triples or quadruples in value, and it is causing you unnecessary worry or anxiety, maybe the better approach with that stock would be to get it out of your life. It’s always good to eliminate undue stress and worry when something is not bringing you joy and satisfaction.

If you’ve got a favorite legacy stock that’s made you a lot of money in the past, you need to remember that this is no guarantee that it’s going to do it again in the future.

The best way to make money with your favorite stock is to not get emotionally tied to it. Know and understand that your favorite stock is going to rotate in and out of favor with the market. This doesn’t mean the company is going under or not going to continue to be profitable. But if you reach the point where you’re “losing money” or “not doing as well as you could be,” it could be time to sell.

A supply and demand investment system (like ours) can tell you if there appears to be enough ‘demand’ in the marketplace for your stock that’s going to lead to above market returns. If not, maybe a better approach is to sell that legacy stock.

The most common objection we get to this advice is, “I made all this money, I’m going to get killed on taxes I really don’t want to take the tax hit.” However, there’s a time to be invested in a stock and then there’s clearly a time when it makes sense to step to the sidelines. If you stick with some stocks long enough, you’re going to watch the stock price go down to the point where you’ve either lost money or you feel a significant loss on profit.

It’s all about the market forces of supply and demand. It doesn’t mean your favorite stock is bad or mismanaged. But based on a supply and demand system, there may be better opportunities elsewhere. And shouldn’t that be where you put your money?

It’s a common misconception — that in order to have enough money to get through the rest of your life, you want a withdrawal rate of no more than 4-6% of your investment account(s). Maybe you are following this so-called rule right now.

I don’t argue with the science or research behind the 4-6% rule. However, when you apply it to the real world; I think it is just a little bit flawed.

A 4-6% withdrawal rate is a “one-size-fits-all” solution – it doesn’t really consider YOU and your individual situation. It doesn’t take into account how old you are, your current health situation, your family’s health history, your life expectancy or your ‘inheritance’ goals.

‘Inheritance’ goals are simply how much money you plan to have “left over” to pass on to your heirs. Some people see having a specific minimum amount the kids or charities to inherit as their definition of success. There are others who never want to be a financial burden to anybody, especially the kids, but want to use and enjoy their money even if there’s not much left for the kids to inherit.

Naturally, how you view your own ‘inheritance’ goal can have a significant impact on what your actual withdrawal rate could be from your investments.

If your goal is to keep your account balance in place — if not allow it to grow over time — maybe 4-6% is a worthwhile target, although you still have to factor in your life expectancy and health situation.

But if leaving your family or other heirs large sums of money isn’t a primary concern, then 4-6% may be too low! 4-6% will probably force you to make sacrifices down the road, and you may eventually realize you could have done other things and had even more enjoyment had you allowed yourself some extra money.

If your ‘inheritance’ goal is to enjoy life, while never being a financial burden, even if there’s not much left over to ‘inherit’ by others, that probably means you’re okay spending some of your principle later in life. As long as you spend it in a gradual controlled manner, with a safety cushion, so that you never run out of money during no matter how long you live.

Now you know why I think it’s a huge mistake for anybody to just set it and forget it. The better approach is to first determine what is it you want to accomplish in your life with your money – something some people would call that goals or milestones that make up what we call a financial roadmap. And then, give that plan or strategy a periodic stress test.

Think of your money as a pension fund. Unless you need all of your money today, the amount you have on any given day really isn’t the most significant issue. The most significant issue is — do you have enough money to generate the income stream or withdrawal rate that you need or desire from your money?

If you think of your investment account as a pension fund, and your pension fund is over funded, that tells you that you have a surplus chunk of money so you’ve got choices. You can increase spending, give more money to family or charity, or, you could adopt a lower risk investment strategy. After all…why take risks you don’t have to?

Conversely if you are underfunded, it doesn’t mean you are running out of money or that you have to reduce your spending. You simply need to continue monitoring, and down the road, maybe reduce spending or increase investment risk by putting more money into growth opportunity areas or some combination of those things.

The probability that you will be able to live life on your terms is going to change — based in part on the financial market. But you may find that your attitude and outlook on life changes as well. And it’s good to be able to have some flexibility so that you can adapt to change.

Years ago, I got a phone call from a gentleman, and the moment he called, I knew without a doubt something was wrong. How? Because this man had never taken an interest in his and his wife’s finances – he had delegated the job to her, and he never dealt with it. She and I would meet every two or three years. She never could quite bring herself to hire us to handle things for her; she preferred to run things on her own and was comfortable pulling the trigger on the investment decisions. And I have to admit, she did a pretty good job.

So, as you can imagine, when her husband called I knew there was a problem. And sure enough, her health had taken a turn for the worse. She was literally on her death bed in the hospital when she told him that he didn’t have to worry. Just come and see me, I would take care of him.

Of course I had some idea on the surface of what was going on but certainly had no idea of the financial details. But I found out. The husband came in with — I think it was 37 — different envelopes, empty envelopes – with the return address of 37 different brokerage firms, mutual fund and insurance companies. His opening comment was, “I have no idea what I have, or how much I have. My wife said you would take care of me. I think I have money with these companies. What do we do next?”

And that’s where we started.

To this day, we really don’t know if we found everything. Somebody from the office went to his home and spent a day and a half just going through files and records. We think we found pretty much everything but we never really will truly know. And neither will he.

It’s very common with couples that one person will take the lead or the responsibility for handling the money and finances. While the other spouse, will take a back seat. We’re probably all guilty of this to one degree or another. I even do it in my own family. But we all need to ask ourselves, “What’s going to happen to me or my spouse – if they are not involved or informed of the day to day money situation or the investment decision making process? What’s going to happen to them if they’re the one that outlives their mate?”

We see this all the time. Like with this gentleman. He’s now being forced to make financial decisions that he’s not used to making and doesn’t really want to make. And the person that he would lean on the most for support and confirmation that he’s making good choices, has just passed away.

So think about that in your own situation. Even if you’re doing a wonderful, admirable job (I assume, since you’re reading this, you’re the one involved in finances), what happens to your partner if he/she is not involved in the money or finances? If they haven’t been involved in any meetings with your financial advisor, will he/she have the trust and confidence necessary to follow thier guidance, to follow thier direction?

It’s definitely something to think about and talk about with your spouse now. Before it’s too late.