Steps for Making a Penalty-Free IRA Withdrawal

It’s always a good idea to keep your Individual Retirement Account (IRA) assets untouched until you can withdraw them penalty-free at age 59½, but you may need to make an exception in this economy.

How can you avoid the tax implications?

In most cases, all or part of any early withdrawal from a traditional IRA will be considered taxable income.

The taxable percentage of the withdrawal depends on whether you’ve made any nondeductible contributions over the years.

Additionally, you may get hit with a 10% penalty tax.

It’s likely impossible to avoid the income tax.

However, you might be able to avoid the 10% penalty tax by taking advantage of the following exceptions to the rule:

•    Withdrawals to cover higher education expenses for you or your spouse, child or stepchild or your or spouse’s adopted child are penalty-free.

•    Withdrawals to cover unreimbursed medical expenses that exceed 7.5% of your adjusted gross income for any tax year are penalty-free.

•    Withdrawals to cover health insurance premiums are penalty-free when they’re used to pay the premiums for you, your spouse or your dependents while you are unemployed.

Many of these techniques are complicated, however.

For example, in regard to health insurance premiums, you must receive unemployment compensation for 12 consecutive weeks under any federal or state unemployment program during the current or preceding year.

Thus, you should seek advice from a tax professional or financial advisor before using any of these strategies.

They can tell you which strategies work best, given your individual financial situation.

How to Get the Most out of Your Financial Advisor

Choosing a financial advisor is only half the battle in ensuring that your investments are properly looked after. Finding a good one is also important.

Following are some tips to help ensure that your experience is a good one:

First, it’s a good idea to set up some ground rules. For example, you may want to ask how often you can expect to hear from your financial advisor. You’ll also want to know whether you’ll hear directly from your advisor or from a staff member. Not knowing this can lead to frustration.

Second, you’ll want to keep your financial advisor informed of your fiscal situation and goals. You likely did that when you first met with the advisor, but finances and goals can change. You may have received an inheritance, made a large purchase such as a car or a house, started caring for an elderly relative, decided to send your children to a more expensive college, or opted to retire earlier than you had originally planned. These are all situations you would want to mention to your financial advisor, as they could necessitate a change in your plan.

Third, keep in mind that your financial advisor may be available to help you with concerns other than those that were part of your original consultations. Perhaps you originally began working with a financial advisor on a single issue, such as portfolio management or retirement planning. It’s likely, however, that your financial advisor can help you with many more issues, from wealth transfer to taxation. Don’t hesitate to ask.

Can Dividend-Paying Stocks Boost Your Income?

Many of today’s retirees are facing an unfortunate scenario. To retire on time, they’ll need to turn their depreciated savings into extra income – at a time when the bond market could start faltering.

Over the past year, bonds have been a haven for many investors seeking alternatives to the low rates available in bank deposits and money market funds.

The result was appreciation in the asset classes that have performed well since the market’s rally began. Those include corporate bonds, high-yield bonds and emerging-market debt.

But the rapid appreciation of these sectors may be behind us because they tend to underperform in rising interest rate environments. That’s because when interest rates rise, the prices of existing bonds fall as newer bonds with higher rates are issued.

Although the U.S. Federal Reserve Board may still be months away from its first interest rate increase, fixed-income investors may want to start considering their options.

One option is investing a portion of one’s portfolio in dividend-paying stocks, which can provide a dependable income stream.

When a company earns profits, it often pays a share of those profits to its shareholders. These profits – called dividends – are typically paid by large, well-established companies that generate profits regularly but are too mature to grow significantly.

Granted, the recession was hard on dividend yields because it was hard on corporate profits. Companies cut payments, driving the average yield of stocks in the S&P 500 down to 2% in March 2001. That’s far below the historical average of 3.8%. But the trend may be turning as companies see their profits improve.

Dividend-paying stocks can be found in many sectors, such as utilities and consumer staples. You can also leave the hunt for dividends to mutual fund managers who specialize in that field, by purchasing shares of a dividend-focused mutual fund.

Thinking of Early Retirement? Vital Tips on Social Security

It’s not a well-known fact, but younger retirees face a harsh penalty for working part-time. If you retire younger than normal retirement age, there’s a limit to how much you can earn and still receive full Social Security benefit payments.

The Social Security administration specifies that “normal” retirement age can vary from age 65 (if you were born in 1937 or prior) to 67 (if you were born in 1960 or later).

Whatever your normal retirement age is, after you reach it you can earn an unlimited amount of money and still qualify for full Social Security benefits.

But if you retire younger than normal retirement age, you are limited as to how much you can earn if you want to still receive full Social Security benefits. For example, before you reach normal retirement age, for every $2 you earn over $14,160, you lose $1 in Social Security benefits. It gets a little better in the actual year you reach normal retirement age, when your benefits will be reduced only when earnings exceed $37,680.

The good news is that these rules apply only apply to earned income. You can have unearned income without losing any Social Security benefits. Unearned income includes income that comes from investments such as retirement plans, pensions, annuities, interest, dividends and capital gains.

So, if you’re planning to retire early but still work, don’t worry. With some advance planning, you might be able to reduce your earned income and make up the shortfall with unearned income.