Newsletter
November 2002
IRS change may help preserve retirement savings
Generally you must wait until age 59½ to begin withdrawing retirement funds, or you face a 10% early withdrawal penalty. One exception allows you to take a series of equal payments for at least five years or until you turn 59½, whichever is longer.
If you're currently taking early distributions, the balance of your retirement account may be shrinking faster than you expected due to the stock market decline. Now you may be able to slow down your distributions to preserve your retirement savings.
According to the IRS, you can now change the way the required withdrawals are calculated. The alternate method bases the required withdrawal amount on the account balance at the end of each year, instead of when you originally began taking distributions. This may decrease your required distribution.
If you'd like details about changing methods, contact our office.
IF YOUR ROTH IRA HAS TAKEN A BIG BEATING, THINK ABOUT CLOSING IT.
Losses become deductible...a miscellaneous itemized deduction, subject to the 2% of adjusted gross income offset. If you're under 591/2, you may lose 10% of the distribution to a penalty. Even if the balance is small, closing the account may still pay off. Keep in mind, though, that to deduct losses, ALL Roth IRAs must be closed, not just the dogs.
YOU CAN DEDUCT THE LOSSES FROM YOUR SHRIVELED ANNUITY
If a deferred NON-QUALIFIED annuity you own has dwindled below the value of your original investment and you surrender the contract, Uncle Sam will shoulder part of your loss. On an annuity contract, your loss is the difference between your investment-what you paid minus any tax- free payouts- and what you get when you surrender the policy. But the deduction is limited. It's not a capital loss but rather a miscellaneous expense. As such, it is deductible only to the extent it and your other miscellaneous expenses exceed 3% of your adjusted gross income.
Exercise caution with 401(k) loans
Borrowing from your 401(k) retirement plan may sound like a great idea. After all, 401(k) loans may help you to pay for college tuition, a new house, or a hospital bill.
With a 401(k) loan, you can withdraw funds quickly and repay the loan at a low interest rate, generally one or two percent above prime. You may be able to repay the loan over five years or an even longer period if the loan is for a principal residence. Not only that, payments are deposited right back into your 401(k) account.
But 401(k) loans also carry some not-so-apparent costs. Consider this: What if you lose your job and can't pay off the loan balance within a preset time? If you're under age 59½, you'll owe a 10% early withdrawal penalty on the outstanding loan balance. In addition, the outstanding loan balance will be added to your taxable income for the year.
There's also the cost of earning less money on your 401(k) account balance after you take out a loan. Over several years, the result can be substantial and can affect the funds you'll have for retirement.
Bottom line: If you need to borrow, it pays to review all your options. For some people, home-equity loans with tax-deductible interest make more sense than 401(k) loans. If you'd like help deciding which options make the most sense for you, give us a call.
Why are companies announcing reverse stock splits?
Perhaps you own a stock that has split since you purchased it. Stock splits are common when a company's share price increases to the point where investors are reluctant to buy it. Splitting the stock creates a lower price that can stimulate trading. After a stock split, you simply own more shares at a fraction of the previous share price. A two-for-one split is like getting two ten-dollar bills for a twenty. You own more shares, but the total value of the shares is initially the same.
Now investors are experiencing another phenomenon. Some stock prices are so low that the companies risk being delisted from the major exchanges, or investors are simply reluctant to buy their stock. To jack up the price, some companies are announcing reverse stock splits. A reverse split is like getting a twenty in exchange for two ten-dollars bills. It reduces the number of shares owned, and it increases the individual share price. Again, the total value of your shares is initially the same.
When evaluating whether to buy or sell an investment, you should always look beyond the share price and evaluate how well the company is actually performing. For assistance, give us a call.
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The information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in the newsletter, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.