How Pension Income and Retirement Account Withdrawals Can Impact Unemployment Benefits
How Pension Income and Retirement Account Withdrawals Can Impact Unemployment Benefits As the economy continues to slow, unemployment claims continue to rise at historic rates.
How Pension Income and Retirement Account Withdrawals Can Impact Unemployment Benefits
As the economy continues to slow, unemployment claims continue to rise at historic rates. Due to this expected increase in unemployment, the CARES Act included provisions for Coronavirus related distributions which give people access to retirement dollars with more favorable tax treatment. Details on these distributions can be found here. With retirement dollars becoming more accessible with the CARES Act, a common question we are receiving is “Will a retirement distribution impact my Unemployment Benefits?”.
Unemployment Benefits vary from state to state and therefore the answer to this question can be different depending on the state you reside in. This article will focus on New York State Unemployment Benefits, but a lot of the items discussed may be applied similarly in other states.
The answer to this question also depends on the type of retirement account you are receiving money from so we will touch on the most common.
Note: Typically, to qualify for unemployment insurance benefits, you must have been paid minimum wage during the “base period”. Base period is defined as the first four quarters of the last five calendar quarters prior to the calendar quarter which the claim is effective. “Base period employer” is any employer that paid the claimant during the base period.
Pension Reduction
Money received from a pension that a base period employer contributed to will result in a dollar for dollar reduction in your unemployment benefit. Even if you partially contributed to the pension, 100% of the amount received will result in an unemployment benefit reduction.
If you were the sole contributor to the pension, then the unemployment benefit should not be impacted.
Even if you are retired from a job and receiving a pension, you may still qualify for unemployment benefits if you are actively seeking employment.
Qualified Retirement Plans (examples; 401(k), 403(b))
If the account you are accessing is from a base period employer, a withdrawal from a qualified retirement plan could result in a reduction in your unemployment benefit. It is common for retirement plans to include some type of match or profit-sharing element which would qualify as an employer contribution. Accounts which include employer contributions may result in a reduction of your unemployment benefit.
We recommend you contact the unemployment claims center to determine how these distributions would impact your benefit amount before taking them.
IRA
No unemployment benefit rate reduction will occur if the distribution is from a qualified IRA.Knowing there is no reduction caused by qualified IRA withdrawals, a common practice is rolling money from a qualified retirement plan into an IRA and then accessing it as needed. Once you are no longer at the employer, you are often able to take a distribution from the plan. Rolling it into an IRA and accessing the money from that account rather than directly from the retirement plan could result in a higher unemployment benefit.
About Rob……...
Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.
5 Options For Money Left Over In College 529 Plans
If your child graduates from college and you are fortunate enough to still have a balance in their 529 college savings account, what are your options for the remaining balance? There are basically 5 options for the money left over in college 529 plans.
If your child graduates from college and you are fortunate enough to still have a balance in their 529 college savings account, what are your options for the remaining balance? There are basically 5 options for the money left over in college 529 plans.
Advanced degree for child
If after the completion of an undergraduate degree, your child plans to continue on to earn a master's degree, law school, or medical school, you can use the remaining balance toward their advanced degree.
Transfer the balance to another child
If you have another child that is currently in college or a younger child that will be attending college at some point, you can change the beneficiary on that account to one of your other children. There is no limit on the number of 529 accounts that can be assigned to a single beneficiary.
Take the cash
When you make withdrawals from 529 accounts for reasons that are not classified as a "qualified education expenses", the earnings portion of the distribution is subject to income taxation and a 10% penalty. Again, only the earnings are subject to taxation and the penalty, your cost basis in the account is not. For example, if my child finishes college and there is $5,000 remaining in their 529 account, I can call the 529 provider and ask them what my cost basis is in the account. If they tell me my cost basis is $4,000 that means that the income taxation and 10% penalty will only apply to $1,000. The rest of the account is withdrawn tax and penalty free.
Reserve the account for a future grandchild
Once your child graduates from college, you can change the beneficiary on the account to yourself. By doing so the account will continue to grow and once your first grandchild is born, you can change the beneficiary on that account over to the grandchild.
Reserve the account for yourself or spouse
If you think it's possible that at some point in the future you or your wife may go back to school for a different degree or advanced degree, you assign yourself as the beneficiary of the account and then use the account balance to pay for that future degree.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Can I Use My 401K or IRA To Buy A House?
The most difficult part of buying a house is coming up with the down payment. This leads to the question, "Can I access cash in my retirement accounts to help toward the down payment on my house?". The short answer is in most cases, "Yes". The next important questions is "Is it a good idea to take a withdrawal from my retirement account for the down
The most difficult part of buying a house is coming up with the down payment. This leads to the question, "Can I access cash in my retirement accounts to help toward the down payment on my house?". The short answer is in most cases, "Yes". The next important questions is "Is it a good idea to take a withdrawal from my retirement account for the down payment given all of the taxes and penalties that I would have to pay?" This article aims to answer both of those questions and provide you with withdrawal strategies to help you avoid big tax consequences and early withdrawal penalties.
401(k) Withdrawal Options Are Not The Same As IRA's
First you have to acknowledge that different types of retirement accounts have different withdrawal options available. The withdrawal options for a down payment on a house from a 401(k) plan are not the same a the withdrawal options from a Traditional IRA. There is also a difference between Traditional IRA's and Roth IRA's.
401(k) Withdrawal Options
There may be loan or withdrawal options available through your employer sponsored retirement plan. I specifically say "may" because each company's retirement plan is different. You may have all or none of the options available to you that will be presented in this article. It all depends on how your company's 401(k) plan is designed. You can obtain information on your withdrawal options from the plan's Summary Plan Description also referred to as the "SPD".
Taking a 401(k) loan.............
The first option is a 401(k) loan. Some plans allow you to borrow 50% of your vested balance in the plan up to a maximum of $50,000 in a 12 month period. Taking a loan from your 401(k) does not trigger a taxable event and you are not hit with the 10% early withdrawal penalty for being under the age of 59.5. 401(k) loans, like other loans, change interest but you are paying that interest to your own account so it is essentially an interest free loan. Typically 401(k) loans have a maximum duration of 5 years but if the loan is being used toward the purchase of a primary residence, the duration of the loan amortization schedule can be extended beyond 5 years if the plan's loan specifications allow this feature.
Note of caution, when you take a 401(k) loan, loan payments begin immediately after the loan check is received. As a result, your take home pay will be reduced by the amount of the loan payments. Make sure you are able to afford both the 401(k) loan payment and the new mortgage payment before considering this option.
The other withdrawal option within a 401(k) plan, if the plan allows, is a hardship distribution. As financial planners, we strongly recommend against hardship distributions for purposes of accumulating the cash needed for a down payment on your new house. Even though a hardship distribution gives you access to your 401(k) balance while you are still working, you will get hit with taxes and penalties on the amount withdrawn from the plan. Unlike IRA's which waive the 10% early withdrawal penalty for first time homebuyers, this exception is not available in 401(k) plans. When you total up the tax bill and the 10% early withdrawal penalty, the cost of this withdrawal option far outweighs the benefits.
If You Have A Roth IRA.......Read This.....
Roth IRA's can be one of the most advantageous retirement accounts to access for the down payment on a new house. With Roth IRA's, you make after tax contributions to the account, and as long as the account has been in existence for 5 years and you are over the age of 59� all of the earnings are withdrawn from the account 100% tax free. If you withdraw the investment earnings out of the Roth IRA before meeting this criteria, the earnings are taxed as ordinary income and a 10% early withdrawal penalty is assessed on the earnings portion of the account.
What very few people know is if you are under the age of 59� you have the option to withdraw just your after-tax contributions and leave the earnings in your Roth IRA. By doing so, you are able to access cash without taxation or penalty and the earnings portion of your Roth IRA will continue to grow and can be distributed tax free in retirement.
The $10,000 Exclusion From Traditional IRA's.......
Typically if you withdraw money out of your Traditional IRA prior to age 59� you have to pay ordinary income tax and a 10% early withdrawal penalty on the distribution. There are a few exceptions and one of them is the "first time homebuyer" exception. If you are purchasing your first house, you are allowed to withdrawal up to $10,000 from your Traditional IRA and avoid the 10% early withdrawal penalty. You will still have to pay ordinary income tax on the withdrawal but you will avoid the early withdrawal penalty. The $10,000 limit is an individual limit so if you and your spouse both have a traditional IRA, you could potentially withdrawal up to $20,000 penalty free.
Helping your child to buy a house..........
Here is a little known fact. You do not have to be the homebuyer. You can qualify for the early withdrawal exemption if you are helping your spouse, child, grandchild, or parent to buy their first house.
Be careful of the timing rules..........
There is a very important timing rule associated with this exception. The closing must take place within 120 day of the date that the withdrawal is taken from the IRA. If the closing happens after that 120 day window, the full 10% early withdrawal penalty will be assessed. There is also a special rollover rule for the first time homebuyer exemption which provides you with additional time to undo the withdrawal if need be. Typically with IRA's you are only allowed 60 days to put the money back into the IRA to avoid taxation and penalty on the IRA withdrawal. This is called a "60 Day Rollover". However, if you can prove that the money was distributed from the IRA with the intent to be used for a first time home purchase but a delay or cancellation of the closing brought you beyond the 60 day rollover window, the IRS provides first time homebuyers with a 120 window to complete the rollover to avoid tax and penalties on the withdrawal.
Don't Forget About The 60 Day Rollover Option
Another IRA withdrawal strategy that is used as a “bridge solution” is a “60 Day Rollover”. The 60 Day Rollover option is available to anyone with an IRA that has not completed a 60 day rollover within the past 12 months. If you are under the age of 59.5 and take a withdrawal from your IRA but you put the money back into the IRA within 60 days, it’s like the withdrawal never happened. We call it a “bridge solution” because you have to have the cash to put the money back into your IRA within 60 days to avoid the taxes and penalty. We frequently see this solution used when a client is simultaneously buying and selling a house. It’s often the intent that the seller plans to use the proceeds from the sale of their current house for the down payment on their new house. Unfortunately due to the complexity of the closing process, sometimes the closing on the new house will happen prior to the closing on the current house. This puts the homeowner in a cash strapped position because they don’t have the cash to close on the new house.
As long as the closing date on the house that you are selling happens within the 60 day window, you would be able to take a withdrawal from your IRA, use the cash from the IRA withdrawal for the closing on their new house, and then return the money to your IRA within the 60 day period from the house you sold. Unlike the “first time homebuyer” exemption which carries a $10,000 limit, the 60 day rollover does not have a dollar limit.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Required Minimum Distribution Tax Strategies
If you are turning age 72 this year, this article is for you. You will most likely have to start taking required minimum distributions from your retirement accounts. This article will outline:
If you are turning age 72 this year, this article is for you. You will most likely have to start taking required minimum distributions from your retirement accounts. This article will outline:
Deadlines to take your RMD
Tax implications
Strategies to reduce your tax bill
How is my RMD calculated?
The IRS has a tax table that determines the amount that you have to take out of your retirement accounts each year. To determine your RMD amount you will need to obtain the December 31st balance in your retirement accounts, find your age on the IRS RMD tax table, and divide your 12/31 balance by the number listed next to your age in the tax table.
Exceptions to the RMD requirement........
There are two exceptions. First, Roth IRA’s do not require RMD’s. Second, if you are still working, you maintain a balance in your current employer’s retirement plan, and you are not a 5%+ owner of the company, you do not need to take an RMD from that particular retirement account until you terminate employment with the company. Which leads us to the first tax strategy. If you are age 72 or older and you are still working, you can typically rollover your traditional IRA’s and former employer 401(k)/403(b) accounts into your current employers retirement plan. By doing so, you avoid the requirement to take RMD’s from those retirement accounts outside of your current employers retirement plan and you avoid having to pay taxes on those required minimum distributions. If you are 5%+ owner of the company, you are out of luck. The IRS will still require you to take the RMD from your retirement account even though you are still “employed” by the company.
Deadlines
In the year that you turn 72, if you do not meet one of the exceptions listed above, you will have a very important decision to make. You have the option to take the RMD by 12/31 of that year or wait until the beginning of the following tax year. For your first RMD, the deadline to take the RMD is April 1st of the year following the year that you turn age 72. For example, if you turn 72 on June 2017, you will not be required to take your first RMD until April 1, 2018. If you worked full time from January 2017 – June 2017, it may make sense for you to delay your first RMD until January 2018 because your income will most likely be higher in 2017 because you worked for half of the year. When you take a RMD, like any other distribution from a pre-tax retirement account, it increases the amount of your taxable income for the year. From a pure tax standpoint it usually makes snese to realize income from retirement accounts in years that you are in a lower tax bracket.
SPECIAL NOTE: If you decided to delay your first RMD until after December 31st, you will be required to take two RMD’s in that year. One prior to April 1st and the second before Decemeber 31st. The April 1st rule only applies to your first RMD. You should consult with your accountant to determine the best RMD strategy given your personal income tax situation. For all tax years following the year that you turn age 72, the RMD deadline is December 31st.
VERY IMPORTANT: Do not miss your RMD deadline. The IRS hits you with a lovely 50% excise tax if you fail to take your RMD by the deadline. If you were due a $4,000 RMD and you miss the deadline, the IRS is going to levy a $2,000 excise tax against you.
Contributions to charity to avoid taxes
Another helpful tax strategy, if you make contributions to a charity, a church, or not-for-profit organization, you have the option with IRA’s to direct all or a portion of your RMD directly to these organization. In doing so, you satisfy your RMD but avoid having to pay income tax on the distribution from the IRA. The number one rule here, the distribution must go directly from your IRA account to the not-for-profit organization. At no point during this transaction can the owner of the IRA take possession of cash from the RMD otherwise the full amount will be taxable to the owner of the IRA. Typically the custodian of your IRA will have to issue and mail a third party check directly to the not-for-profit organization.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
