Jeffrey Thatcher: Financial Planning: April 2012

Tuesday, April 24, 2012

Should You Tap Your Retirement Account?

Since the housing and stock markets collapsed a few years ago, millions of Americans have found themselves in need of cash, either for short-term or long-term expenses. Those who have contributed regularly to a workplace retirement plan, such as a 401(k) or 403(b), may find it tempting to tap into those accounts to help cover their bills, either through a loan or a distribution. Before any pre-retirement withdrawal is made, it's important to know the facts and consider the consequences.

Your decision should be influenced, in part, by the severity of your needs and the tax implications of the option you choose. Loans are not considered taxable distributions unless they fail to satisfy plan rules regarding the amount, duration, or repayment terms. However, distributions (including hardship withdrawals) are generally taxable as ordinary income, and workers who receive retirement plan distributions before reaching age 59 1/2 may be required to pay an additional 10% early withdrawal penalty.

Loan Considerations

When considering a loan, there are several rules to keep in mind.

· The IRS generally limits the amount of a loan to 50% of your vested account balance, up to a maximum of $50,000.

· Most retirement plan loans must be repaid within five years, although loans used to purchase the participant's primary residence may be paid back over a longer period of time.

· You may not be able to make new contributions to your plan until the loan is paid off. Additionally, loans are repaid with after-tax contributions, and interest (usually 1% or 2% above the prime rate) is due.

It's important to remember that not all plans allow loans. A violation of any of the plan's loan rules may cause the loan to be treated as a taxable distribution. Additionally, an employer may require participants who have taken a loan to repay the entire amount immediately upon leaving the company, regardless of the original repayment schedule. If an ex-employee fails to do so, the employer is required to report the loan to the IRS as a distribution.

Hardship: A Last Resort

The government has made the rules around applying for and receiving a hardship withdrawal of your retirement plan assets difficult for a reason: they want to ensure that the need for those funds is vital. Most plans only allow a hardship if all other means (including loans) have been exhausted.

Hardships can be taken if they meet certain requirements, including:

· Unreimbursed medical expenses for you, your spouse, or dependents.

· Purchase of a principal residence.

· Payment of college tuition and related educational costs (such as room and board) for you, your spouse, dependents, or nondependent children.

· Payments necessary to prevent eviction from your home, or foreclosure on the mortgage of your principal residence.

· For funeral expenses.

· Certain expenses for the repair of damage to the employee's principal residence.

Ordinary income taxes (both federal and state, if applicable) are due on the withdrawal amount, but the 10% early withdrawal penalty may not apply in certain situations, such as when the distribution is made:

· Because of a qualifying disability.

· To pay medical expenses that exceed 7.5% of the participant's adjusted gross income.

· Due to a "separation from service" (i.e., ceased to be employed by the company sponsoring the plan) during or after the calendar year in which the participant reaches age 55.

· To an alternate payee under the terms of a qualified domestic relations order (QDRO).

· On account of certain disasters for which IRS relief has been granted.

Note also that a hardship withdrawal cannot be repaid into your account. Your retirement plan administrator and financial professional can help you determine your options. Be sure to consider all options and consult a professional before making decisions that could effect on your financial future.

Jeffrey Thatcher is a CERTIFIED FINANCIAL PLANNER ™ and Director of HVFCU Financial Services, the investment division at Hudson Valley Federal Credit Union.

Securities offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates.

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Hudson Valley Federal Credit Union and HVFCU Financial Services are not registered broker/dealers and are not affiliated with LPL Financial. This material was prepared for Jeff Thatcher’s use.

Tuesday, April 10, 2012

Financial Planning Tips for Unmarried Couples

Today's "modern family" is decidedly nontraditional. According to the latest Census data, fewer than 25% of American households currently consist of married couples with dependent children, while more than 40% of unmarried couples have children under the age of 18. Even the term "married" can be defined differently depending on where you live. Some states allow and recognize same-sex marriage, but the majority of states and the federal government do not. Therefore, it's important for domestic partners to ensure they have legal protections in place to protect their families and themselves.

Legal Protections

Unmarried partners lack many of the legal protections granted to spouses in the event of divorce or death. Although most states will consider a claim by an unmarried partner, there is no specific legal precedent in the absence of a written contract. Domestic partners may wish to consider creating a domestic partnership agreement that details the sharing of expenses as well as the ownership and distribution of assets should the relationship end. Unmarried couples with children should consider signing a written agreement acknowledging parental rights and responsibilities and having each partner name the other as primary guardian in their respective wills.

Retirement Considerations

Unmarried couples are not eligible for their partner's Social Security benefits and, in some cases, employer sponsored retirement plan distributions. The IRS allows a non-spousal beneficiary of an IRA to take required distributions over his or her lifetime rather than in a lump sum, allowing for potential tax-deferred growth over a longer period of time. Domestic partners who can afford to do so may want to contribute the annual maximum to an IRA to capitalize on this benefit.

Estate Planning Issues

If an unmarried individual dies without a will, the state may distribute assets to his or her closest blood relatives, leaving out the surviving domestic partner. To help rebut a challenge to a will, domestic partners may want to videotape their wishes in the presence of an attorney.

Federal tax law allows all assets to pass to a spouse tax free and no applicable estate taxes are due until the second spouse dies. Unmarried couples, however, do not enjoy this tax advantage. For those with significant taxable assets, it will be necessary to pursue other avenues to avoid estate tax. One strategy is to purchase life insurance to pay any potential federal and state estate taxes. The surviving partner must own the insurance to avoid it becoming part of the estate of the deceased. Therefore, each partner should own enough insurance to pay anticipated taxes on the assets of his or her partner.

Protecting your family’s financial future is important. If you are part of a “modern family”, it is important to understand the benefits and limitations of the laws and regulations in your state, as they could have long-term financial effects.

This communication is not intended to be legal and/or tax advice and should not be treated as such. Each individual's situation is different. You should contact your legal and/or tax professional to discuss your personal situation.