Archives for July 2010

Roth IRA Withdrawal Rules

The Roth IRA is an investment option that I love because of it allows your money to enjoy tax free growth and for the diversification it can bring to your tax situation at retirement. It can be great to have some tax free investments like the Roth in addition to pre-tax investment types like a 401k or IRA.

It's a good idea to try and put your money in, and never touch it until retirement so that you can enjoy the wonders of compounding interest, however, sometimes people run into situations where they'll need to do an IRA Withdrawal . Thankfully for those people the Roth IRA is an extremely flexible retirement account type and withdrawing the money you put in can be done tax and penalty free at any time.

Where you need to be wary is when you're considering taking an early distribution on your earnings before retirement age. If you aren't making a qualified distribution, you could end up paying not only your regular tax rate on the money, but a 10% early withdrawal penalty to boot.

Make A Roth IRA Withdrawal Of Contributions With No Penalties

One of the great things about the Roth IRA is that you can make a withdrawal of your principle balance/contributions at any time you please – without penalty. Where it gets a little stickier is when you try to withdraw the earnings off of your principle. The earnings can't be withdrawn without penalty until you reach the age of 59 1/2. Again, as mentioned above you can usually make a withdrawal of your principle contributions at any time. The earnings off of your principle can't be withdrawn until you reach the age of 59 1/2 or you'll end up paying a 10% early withdrawal penalty. You don't want to pay penalties now do you?

There is one situation in which you wouldn't be able to withdraw your earnings after 59 1/2 – it's when you have started the roth IRA within 5 years of when you turn 59 1/2. It's called the 5 year rule.

Roth IRA 5 Year Rule

You can only withdraw your earnings from your Roth IRA at 59 1/2 and have them count as qualified distributions if it has been at least 5 years since your Roth IRA account was opened. However, for example, if you opened your account at 57, you would need to wait until you were 62 to withdraw any earnings on your principle.

Qualified Reasons To Withdraw Roth IRA Earnings

There are a few situations where you can withdraw from a Roth IRA without taxes or penalties:

You are age 59½ or older. (see 5 year rule above)
The distribution was made to your beneficiary after your death. (you can't take it with you!)
You are using the money to buy a home, and are a first-time homebuyer ($10,000 lifetime maximum per account)
You're disabled.

Other Exceptions to 10% Penalty

Some people may find they need to withdraw money from their Roth IRA for a non-qualifying reason. They may still be able to get around the 10% early withdrawal penalty in these situations: (taxes will still be assessed)

You have un-reimbursed medical expenses that exceed 7.5% of your adjusted gross income.
You are paying medical insurance premiums after losing your job.
The distributions are not more than your qualified higher education expenses. (pay for schooling!)
The distribution is due to an IRS levy of the qualified plan.
The distribution is a qualified reservist distribution.
The distribution is a qualified disaster recovery assistance distribution.
The distribution is a qualified recovery assistance distribution.

Roth IRA Distributions Made In This Order

According to IRS publication 590 when you take your money out of your Roth IRA, the money comes out in this order.

Regular contributions.
Conversion and rollover contributions, on a first-in-first-out basis (generally, total conversions and rollovers from the earliest year first). Take these conversion and rollover contributions into account as follows:
- Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the
- Nontaxable portion.
Earnings on contributions.

The distributions are done in such a way as to help you avoid paying taxes and penalties if at all possible. Your contributions to your account come out first, followed by rollover contributions and earnings on your contributions.

Try Not To Withdraw Until Retirement

Roth IRAs are great because they allow you to have flexibility when it comes to taking disbursements from your account. Your contributions are always free to be withdrawn without taxes or penalties. On the other hand, if you're not careful – when you're taking out the earnings on your principle – you could end up having to pay taxes and fees. Not to mention – by withdrawing your money you're killing the effects of compound interest.

If at all possible, try not to withdraw your money – and if you do, make sure you've got a qualified reason!

Now start saving!

Have you considered taking your money out of your Roth IRA early? Was it for a qualified or non-qualified reason? Are there other reasons you can think of that you might withdraw your money? Tell us what you think in the comments.

Keep It Simple Stupid: Sometimes We Make Things Too Complex

By Mr. Money 3 Comments

One thing I've realized over the past few weeks is just how complex we as human beings like to make things, even when they could be so simple. We love to take things that really are pretty basic and easy to understand, dissect them and turn them into something more complex, and harder to understand. The thing is – things don't need to be complex – and are often easier if you just get down to the basics.

Simple Things Made Complex

Here's an example. My wife and I just had a baby 2 weeks ago (That's him up above!). For the previous 9 months we had been reading everything we could get our hands on on raising children, what to expect when the babies arrive, how to properly put them to sleep, how and how often to feed them, what things you need to buy for your child before they arrive – and so on. With all of the information out there things can start to get extremely complex really fast. I can understand how many new parents feel overwhelmed with all of the decisions that they have to make – it ends up being paralysis by over analysis.

What I've realized over the past 2 weeks, however, is that having a baby and fulfilling their needs – while it can be very complex – is actually very simple. All the baby needs you to do is feed it, change it's diapers and allow it to sleep. As long as you do those things the baby will thrive! Yes, there is a lot more to it, but as long as you do those things – and you just focus on the basics – you'll do just fine!

Personal Finance Made Simple

Like having children – personal finance can also be made much more complex than it needs to be. People feel overwhelmed with the amazing amount of choices when it comes to different budgets to follow, what types of investments to make, how to get rid of debt, which investment guru to follow, paying for college educations and more. The thing is – it really isn't that complex. It really comes down to a few simple principles that you can follow:

Spend less than you earn – and live below your means.
Stick to a budget.
Plan ahead for emergencies.
Save for the future.
Give!

Everything else is just an offshoot of those basic principles (although your basic principles may be a bit different than mine).

It's Easy To Get Overwhelmed. Instead – Simplify!

So next time you start feeling overwhelmed when it comes to your finances, take a step back, and try to look at things simplified. Look at the basic concepts of the subject you're examining, and work out from there. It will help you to stay focused, and remind you of what's important when it comes to money. Sometimes the most complex solutions aren't as helpful as the most basic of concepts.

What do you think? Do you have a suggestion for ways to keep from being overwhelmed? Has simplifying a concept ever helped it to make more sense to you? Tell us your thoughts in the comments.

Deadline To Close On Your Home And Receive Your Homebuyer Tax Credit Extended To September 30th

By Mr. Money Leave a Comment

Last month I wrote about how congress and the White House were considering extending the $8,000 and $6,500 homebuyer tax credits. At the time it wasn't a done deal that an extension would be granted because the provision was being included as a rider on a controversial jobs bill that wasn't sure to pass both halls of congress. Sure enough, the bill didn't pass, and legislators were sent scrambling trying to find a way to pass an extension for the thousands of people thought to be in limbo with their closings on their new homes. If something wasn't done they would lose out on the tax credit.

H.R.5623 Passes And Extends Closing Deadline

Last week congress got the deal done and passed H.R.5623 – Homebuyer Assistance and Improvement Act of 2010. The bill doesn't allow new homebuyers to get in on the tax credit, but gives people who were under contract by 4/30/2010 a few extra months to get their deals finalized, and still receive the credit.

From BusinessWeek.com

Qualified homebuyers who signed purchase contracts before April 30 will have until Sept. 30 to complete paperwork and settle on the house. The original settlement deadline was June 30.

“They’re cheering out there, they’re really rejoicing,” Lucien Salvant, a spokesman for the National Association of Realtors, said of homebuyers. The group sought the extension.

The House voted 409-5 on June 29 to extend the deadline, and the Senate approved the measure on a voice vote last night. Republicans, including Senator Jim DeMint of South Carolina, had tried to block the extension, calling the tax-credit program flawed.

“We only created a bubble, which will eventually burst,” DeMint said on the Senate floor late yesterday as the deadline was about to expire. “For the people who haven’t closed on their homes by today, it’s not that they won’t get their house, only that they won’t get a taxpayer subsidy for having bought a house now rather than later.”

The bill was signed into law on July 2nd by President Obama.

Extension Of Homebuyer Tax Credit Will Make Some Happy – Others Skeptical

I know the passage of this bill will be a relief to many folks who ended up buying a house this spring simply because of the credit, and were horrified to find out they might not close on their house in time.

Whether or not this is a good idea is another story. Many have said that the tax credit only artificially pumped up the real estate market, and is causing another mini real estate bubble. They say the worst is yet to come. May and June have both shown a significant drop in new contracts on homes, and some experts expect that to continue.

What do you think about the tax credit extension? Is it ok since it isn't extending the credit to new buyers – and only extending the deadline for those under contract by 4/30? Have the tax credits and other stimulus created another mini-bubble only delaying a bottom to the market? Tell us your thoughts in the comments.

Save Money On Hefty Hospital Bills Simply By Requesting A Discount

By Mr. Money 6 Comments

The past couple of years have been tough ones at our house, and we've ended up spending weeks in the hospital for a variety of surgeries, births and other medical issues. We've been spending a lot of money on our family's health care costs. In fact, if we hadn't had health insurance we probably would have ended up paying in excess of $300,000 over the past 3 years.

Even with health insurance our hospital and health care bills have still been in the tens of thousands of dollars – and if we hadn't found this money saving tip, it would have been much more!

What is the tip? We ask for a discount on our health care!

Save Money On Health Care By Asking For A Discount

A couple of years ago my wife was in the hospital for a unexpected medical emergency. We ended up amassing some pretty large bills, and when it was all said and done, we had several thousand dollars worth of care to pay for.

A friend of ours told us that they had found out through another friend that often if you just ask the billing department at the hospital for a discount, or tell them that you need some help paying your bill, they're often willing to work with you and give you discounts in the range of 10-20% or more!

Smart Money Magazine explains why they're often open to hearing from you, and why they'll give a discount:

When it comes to getting paid, hospitals have their work cut out for them. Medical bills are a major cause of bankruptcy in the U.S., and when collectors are put on the case, they take up to 25% of what is reclaimed, according to Mark Friedman, founder of billing consultant Premium Healthcare Services. That leaves room for some bargaining.Take Logan Roberts. The 26-year-old had started work as a business analyst near Atlanta but had no insurance when he was rushed to the ER for an appendectomy. The uninsured can pay three times more for procedures, says Nora Johnson, senior director of Medical Billing Advocates of America; Roberts was billed $21,000. “I was like, holy cow!” he says. “That’s four times my net worth.”

After advice from advocacy group The Access Project, Roberts spoke with hospital administrators, telling them he couldn’t pay in full. Hospitals frequently work with patients, offering payment plans or discounts. It paid off for Roberts, whose bill was sliced to $4,100 — 20% of the original.

So basically it boils down to this: Hospitals are willing to give discounts or help people pay for their bills because it's cheaper for them than having to put a bill collector on the case, especially when the collector will take up to 25% of what is collected. It is in the hospital's best interest to work with those who are trying to pay their bills.

When we asked for a discount on my wife's hospital bills we ended up saving about 10% off of our total bill, which came out to several hundred dollars. Not bad for a single phone call!

Save Money Everywhere By Asking For A Discount

The fact is that hospitals aren't the only place that you can ask for a cash discount, or for a discount for paying in full. For example, many electronics stores have wiggle room on their prices which means that you can usually ask for a discount on the item, or work deals where you buy two items, and get one for free. Just ask for a manager or someone in authority who can make the decision.

The moral of the story is that it never hurts to ask for a discount.

Ask for a discount or help in paying.
Ask for it in writing – or for a new bill to be sent.
Pay in cash in full.

That's it!

Have you ever saved money at the hospital or elsewhere just by asking for a discount? Tell us your story or thoughts on the topic in the comments.

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