Archive for the ‘Retirement’ Category

Cash Out 401(k)?

October 27th, 2015

hammer-bank-sm shutterstock_13790779-1There are many situations where people find reasons to cash out a 401(k) retirement plan.  Sometimes it happens with a job change.  Other times a divorce leads to splitting the balance in one spouse’s retirement account.  It is done for other reasons, too.

Recently I talked with someone who withdrew a substantial sum from her then-husband’s retirement plan as part of a divorce.  It seemed like a good idea at the time, but it has turned into a huge black cloud hanging over her head.

Why?  Because she didn’t understand the tax implications.  An early withdrawal from a retirement plan affects your taxes in two ways:

  1. There’s a 10% Federal tax penalty because you withdrew before retirement age.  For example, if you withdrew $50,000, the 10% penalty would be $5,000.
  2. The amount you withdrew is added to your taxable income for the year.  If your taxable income (after deductions and exemptions) was $20,000, a $50,000 401(k) withdrawal makes it $70,000.  On the federal return, that’s enough to bump you from the 15% tax bracket into the 25% tax bracket.  It will increase your state taxes as well.  The result, for this example, could easily be an extra $10-15,000 in federal and state taxes – perhaps more (on top of the $5,000 penalty for early withdrawal).

The woman I talked with had been told by the 401(k) company that they would withhold taxes, but they didn’t withhold nearly enough.  Add on interest (for late payment) and she’ll be probably be paying that tax bill for at least 10 years.

I felt horrible for this woman and the hardships she is facing, but there was nothing I could suggest that would change her situation.  What I can do, though, is to continue to share information, hoping to help others to avoid this situation.  Remember:

  • In a job change or divorce, you don’t have to withdraw from a 401(k) – instead, you can roll the funds into an IRA.  This prevents tax hassles and builds retirement security.
  • If you do consider an early withdrawal from a 401(k) plan (for whatever reason), be sure to consult a tax specialist who understands the details of your situation.  You will still need to pay the taxes, but you’ll plan for that up front and prevent a decade-long debt to the IRS.

Early withdrawals from a 401(k) take careful planning.  ~Barb

Barb Wollan is a Family Finance specialist and a VITA volunteer tax preparer


You Don’t Know What You Don’t Know

October 15th, 2015

expensesWe – my brother and I – received some legal papers in the mail today that had A LOT of blanks that need to be filled. My task is to create a spending plan for how we will meet Dad’s future needs. There is a need for more than one spending plan. The financial needs at the end of life are different than those when you first retire; which is also different than the time between the beginning and the end. Some of the variables include: medication, travel and hobbies, housing needs, etc.

For dad, the final years are easy to calculate. We know where he will be living and how much it will cost to live his final days/months/years in a Memory Care Unit. It is the time between now and then that gets fuzzy.

I envision dad living with me until he needs to go to the Memory Care Unit. My brother reminded me that, just because dad is living with me, it doesn’t mean he isn’t incurring the same expenses he would incur if he were living in an Assisted Living facility; our home (staffed by my husband and me) IS the Assisted Living facility. So for the sake of filling in the blanks on the legal document, I had to put a dollar figure on the value of living in my home – and all the assistance that come with it. It would be a huge headache to actually calculate how much he eats, how much time we spend doing his laundry, cooking, assisting, medicating, etc. The easier way to find the numbers was to contact the Assisted Living Care Center just down the road and ask how much they would charge, if dad were living there.

Rent is based on square footage and includes housekeeping, laundry and 2 meals a day:

  • 625 sq.ft = $1536.75/mo.
  • 725 sq. ft – $1792.25/mo.
  • 750 sq. ft = $1864.75/mo.

The level of care needed is an additional charge, in 15 minute units

  • Level I (18 units/mo.) = 4.5 hours a month = $788
  • Level II (110 units/mo.) = 27.5 hours a month = $1284

I can calculate some additional costs based on the past 6 months he has lived with me: life insurance, medication, co-pays, dental, optical, medical mileage, hair cuts, cell phone, supplements and publications.

My favorite saying is, “You don’t know, what you don’t know”. As you look at my numbers, are there other expenses I am forgetting?  ~Brenda

Retirement, Spending plans

myRA- Another way to Contribute

September 24th, 2015

125183558Changes – good changes – are coming in how individuals can make contributions to the new myRA accounts.  Our May post shared some details of how to enroll and who was eligible. At that time, the only way to participate was to have your employer withhold contributions from your paycheck. Beginning this fall, you can submit to the US Treasury your bank routing and account numbers for auto-withdrawals.  The new option  should make it possible for self-employed individuals to participate in this new Roth option.

When you file your tax return at the beginning of 2016 you will also be able to direct all or part of your  federal tax refund to your account. In the refund section of your tax return simply mark the “Savings” box, provide your myRA account and routing numbers, and designate how much of your refund you want to put towards your savings. If your income falls within the range that qualifies for the Retirement Savings Tax Credit, you’ll realize additional tax savings.


Retirement, Saving ,

Will Social Security Survive?

July 28th, 2015

1-intro-lgWhen I’m teaching classes about finance I frequently hear young adults question whether Social Security is going to factor into their retirement income. They often believe that it will run out of funds before they can receive any benefits. Is there truth to this assumption?

Each year the Social Security Trustees issue a financial report card. Beginning in 2020, in order to meet the current benefits schedule, Social Security will need to use taxes collected from payrolls, the interest earned by the Trust Fund and the principal in the Trust Fund. The projected date for using all the assets in the Trust Fund to pay benefits will be 2034. That doesn’t mean the program will be bankrupt. It means that benefits will have to be reduced to be in balance with the taxes collected from salaries. If the system keeps operating as is, you would still receive Social Security when you retire; it would just be a smaller amount.

The Trustees stated that an increase of 2.68% in taxes, 1.34% for you and 1.34% for your employer,  would delay the date when the Trust would be depleted to 2089. Putting this increase in place would mean that today’s 25-year-old worker could expect the full benefits that are promised today at the time they retire.

The question for young adults is “Are you willing to set money aside today for Social Security Benefits tomorrow?”

You can read the full Trustee report here:


Retirement, Saving

The Binder

May 27th, 2015


Two years ago, I piloted a program based on materials developed by the National Endowment for Financial Education: What Every Adult Child Should Know. By the end of the 7-week program, participants would have a binder full of information – the location of Wills, Powers of Attorney, Insurance Policy information; Balance Sheets, Spending Plans, Contact information for Doctors, Lists of medications, Property inventory, bank accounts and safe deposit boxes. All things needed to assist with the decisions made for the care for an aging parent.

One elderly gentleman in the class was the primary caregiver for his wife. He had tried to get their children to take the class so they would be better prepared to make decisions on behalf of he and his wife. They refused to come. Half way through the class, he fell and broke his hip and spent a couple of weeks in the hospital. His children became the caregivers for their mother in his absence. His children were lucky, because he had completed his binder. The children were able to step in and provide continuity of care, thanks to the information he had compiled in the binder.

I started to prepare my binder for the day when my children would need to make decisions for my husband and me. I also broached the subject with my dad and his wife but was brushed off – they assured us that they had everything in order: wills, advance directives, a trust. There was nothing to discuss.

On a Friday night in mid-March, I learned that my 80 year old dad, diagnosed with dementia, would be coming to live with me the next afternoon; his wife was no longer interested in being part of his life. By Tuesday, new Power of Attorney forms and Advance Directives for health care were drawn up, naming my brother and me as decision-makers on my dad’s behalf.  I wasn’t worried about money; Dad had worked hard his whole life and had more than enough resources to provide for himself and his wife: Long-term care insurance, Pensions, Social Security, Assets.

Getting the Power of Attorney document completed was valuable, but it wasn’t enough to access the resources needed to care for dad. My dad and his wife had put all their assets in a joint trust, and it took a lot of detective work to get access to his share of those assets.  It was a challenge to gain even basic income and insurance coverage because we were denied access to some key documents:

  • bank accounts
  • insurance policies;
  • pension documents
  • birth certificate
  • military discharge papers, which provide access to VA benefits.

We’ve learned a lot in the past couple of months.  One of the most important lessons?  The binder would have been useful in helping my dad.  I mentioned that two years ago I had started to prepare my binder to assist my children when they would need to make decisions on my behalf; however, I never completed the task.  I have now renewed my effort to complete my binder.  ~Brenda

Consumer Knowledge, Retirement

Temporary/Part-Time Workers Can Save!

May 7th, 2015

shutterstock_110517083Jim is a temporary full-time employee at an agriculture business; his job for the summer is to work with the grounds crew running a lawn mower. Nancy is going to start working part-time for the local grocery, stocking shelves and learning how to run the cash register. Both individuals would like to “save” a portion of their income.  I hope they know about and will consider the new MyRA, a Roth account available from the US Treasury.

The new account is available to anyone who is a wage earner and doesn’t have access to a retirement plan at work — in other words, anyone like Jim and Nancy who are temporary workers or work part-time. There is an income cap of $131,000 for individuals to use the plan. There are no fees for management and the Treasury is paying 3.19% return. Right now enrollment is limited to individuals whose employers use direct deposit for pay.

Why is this something to consider? Because you can withdraw what you’ve contributed after 5 years with no taxes or penalties. So Nancy, who is 16, would have an emergency account when she is 21 to pay for the cost of moving to take that first job after college graduation. Jim ,who is 18, will be 23 in five years and might be planning to get married and buy his first home. First time home owners can withdraw both contributions and earnings tax fee.  Even if they don’t use the account in these ways, they have a decent return on their savings.  What’s more, that savings won’t put a dent in any financial aid they qualify for when going to school, and they will have the added flexibility a Roth account provides when making financial decisions in retirement.


Retirement, Saving

Social Security Reform: 2005

May 5th, 2015

1-intro-lgMy co-workers know that when I don’t have a desire to finish a task I’ll procrastinate by finding something to clean, sort or do that involves anything but sitting and typing. During this morning’s exercise in avoidance,  I came across an old file titled, Social Security Reform.

The materials collected were from 2005. The hot political discussion at the time was to change Social Security and allow individuals to move part of their contributions into private investment accounts. By law Social Security funds must be invested in government securities, and many viewed this investment as secure but under par for return. The proposal was met with mixed reviews;  many of the documents I had collected questioned the impact. Evidence could be found that suggested such a change would result in reduced retirement income for some individuals.

Each year the status of the Social Security program and it’s Trust Fund are reviewed and recommendations for change are made. The recurring themes  resulting from the review are to increase retirement ages, increase withholding from pay, and raise the dollar amount that is subject to the withholding tax.

I guess Congress has the same bad habit that I do, if you don’t want to deal with it at the moment, procrastinate! Perhaps in this case it was a good thing, the loss of investments in 2008 made us all aware that with expectations for high return come the risk of high losses. It stopped the political promotion of the idea that we should invest Social Security funds in equities. Unfortunately, just like the work I left undone on my desk this a.m., the Social Security program still needs to be fine tuned. Perhaps, just like my work, it doesn’t need any creative touches but time on task.


Consumer Knowledge, Retirement

Money Smart Week – April 18-25, 2015

April 21st, 2015

IMG_0039Money Smart Week, started 13 years ago by the Federal Reserve Bank of Chicago, is designed as a public awareness campaign to help consumers better manage their personal finances. Here in Iowa, more than 200 partner organizations have joined in the fun, promoting financial education with many interesting opportunities to learn. All Money Smart Week programs are free, and strictly educational (no marketing allowed).

ISU Extension and Outreach has been a MSW partner for many years. Programs are offered for audiences from preschoolers to seniors. From scout nights to shred days, essay and poster contests, geocache for college cash, piggy banks, books, and kites – in many cases, a chance to win a prize makes the learning even more fun. Educational program topics include: establishing a budget, protecting financial information, raising money-smart kids, and more.

Go to for more details about activities in your area. Check out your local libraries for a display as well as programming. Spread the knowledge!

Consumer Knowledge, Credit, Goals, Retirement, Saving, Uncategorized

The Lost Pension

November 13th, 2014

imagesMoneyIf you’ve read the state-wide news recently you know that a grocery store in Iowa has filed for bankruptcy. Included in the details is the report that pension benefits have been suspended. I was puzzled by a press statement that an individual had lost a significant sum of retirement money. The wording might have been misleading because individuals don’t contribute to pension plans; they are totally funded by the employer. Unlike a 401K , what you have is a promise of future benefits if the company remains in business and is financially sound. So will the individual lose all those promised payments?  Maybe, maybe not.

Companies who still offer a pension plan can participate in the Pension Benefit Guaranty Corporation (PBGC).  PBGC  is a US government agency created in 1974. PBGC is not funded by general tax revenues; it collects insurance premiums from employers that sponsor insured pension plans. The premiums are invested to earn revenue and PBGC receives any remaining balances in a pension account if a company is dissolved due to bankruptcy.

The benefit for employees  who are eligible for an insured pension is a guarantee they will receive at least part of their benefits if the company fails. The maximum pension benefit guaranteed by PBGC is set by law and adjusted yearly. For plans that end in 2014, the maximum guarantee for workers who retire at age 65 is $59,318.16 yearly ($4,943.18 monthly). The guarantee is lower for those who retire early or when there is a benefit for a survivor. The guarantee is increased for those who retire after age 65.

At the PBGC website you can find out if your company participates; track down a lost pension; and find resources related to retirement.  A search of the site didn’t answer the question about the grocery store, but I did find my husband’s pension fund.



Insurance, Retirement

When Dad Speaks, I Listen…

September 30th, 2014

father and daughter picWhen my dad speaks, I listen.  He is not E.F. Hutton but he is the best I have.  My dad is pretty soft spoken so you need to pay attention.

Recently I was reading an article that made me think of my dad.  Another daughter had a conversation with her father in which he shared his go-to mantra:  “A big part of wealth building is to spend less and live within your means.  When the good years come along, sock away as much as you possibly can, because you never know when a bad patch might arise.”

My father shared with me to put money in an IRA annually.  At the time it was $166.66 per month and then there was benefit at income tax time too.  By doing that 30 plus years ago – and compounding and the time value of money – I have a nice pool of money for retirement.

Another lesson learned from my father was the process of buying a car.  I personally hate that it takes much longer than I think it should.  When I was in college, my dad was purchasing a car for my sister and we were in the showroom for four plus hours. – Does my dad like to dicker? – Yes.  I remember when the papers were signed that he was within $200 of an earlier offer.  I learned it pays to do your homework!  Decades later, the Internet helps with that homework, so you can go in with a game plan – knowing what your vehicle is worth as well as what the sticker price is before you buy.

Dad does present lessons to remember.

~ Susan

Consumer Knowledge, Credit, Retirement, Saving, Smart shopping, Spending plans