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Q&A: Tapping IRA creates a taxing problem

June 29, 2020 By Liz Weston

Dear Liz: I took $250,000 out of my retirement account in 2019 to set up five 529 accounts for my young grandchildren. As a result, my federal and state tax bills are $80,000. I’ll need to take that money out of my IRA. Will I keep having to pay large tax bills in order to pay for that one-time large withdrawal?

Answer: While your heart was in the right place, your money wasn’t. Withdrawals from IRAs are taxable, and such a large withdrawal almost certainly pushed you into a much higher tax bracket. If you had consulted a financial planner or a tax pro, they would have advised you to either fund the 529s from a non-retirement account or to make smaller withdrawals over several years to avoid such a big tax hit.

If you continue to tap your IRA, you will continue to owe taxes on the money you withdraw. The $80,000 will incur state and federal taxes. If you again pay the tax bill on the $80,000 using your IRA, you’ll owe taxes on that money as well, and so on.

You may not think that’s fair, but the reason your IRA is taxable now is because you got a tax deduction when you made the original contributions, and the money has been growing tax deferred in the meantime. Eventually, the government wants to get paid back for those tax breaks.

Filed Under: Q&A, Retirement, Taxes Tagged With: IRA, q&a, Taxes

Friday’s need-to-know money news

June 26, 2020 By Liz Weston

Today’s top story: How to plan and budget for DIY projects now. Also in the news: How to factor climate change into your air travel, why it’s probably better to lease a car than buy one right now, and new rules for medical and dependent care FSAs.

How to Plan and Budget for DIY Projects Now
Tailor do-it-yourself home projects to fit current circumstances by considering the size, type and cost of the work.

Ask a Points Nerd: How Can I Factor Climate Change Into My Air Travel?
Being intentional about the airlines you choose and how often you fly can help reduce your carbon footprint.

Why it’s probably better to lease a car than buy one right now
5 reasons why leasing is a smart choice during these chaotic times.

New Rules for Medical and Dependent Care FSAs
New rules bring more flexibility.

Filed Under: Liz's Blog Tagged With: budgets, car leasing, climate change, DIY projects, FSA, Points Nerd, travel

Thursday’s need-to-know money news

June 25, 2020 By Liz Weston

Today’s top story: How “maximizers” can cut decision making angst. Also in the news: Know the options and risks of credit card relief, 7 smart spending strategies in a tough economy, and how to set up an 80/20 budget. ”

How ‘Maximizers’ Can Cut Decision-Making Angst
Avoid analysis paralysis and buyer’s remorse by focusing on the goals behind a money decision, not all the choices.

If You Need Credit Card Relief, Know the Options and Risks
Hardship programs can help people who don’t have good options for paying their bills, but they carry some risks.

7 Smart Spending Strategies in a Tough Economy
Tough times require smarter spending.

How to Set Up an 80/20 Budget
Paying yourself first.

Filed Under: Liz's Blog Tagged With: 80/20 budget, budgets, credit card relief, maximizers, spending decisions, spending strategies

Wednesday’s need-to-know money news

June 24, 2020 By Liz Weston

Today’s top story: A bargain hunter’s guide to used car shopping. Also in the news: Unlock savings with these little-known credit card benefits, finding the outperformers in the stock market, and 7 hacks you need to survive tax season.

A Bargain Hunter’s Guide to Used Car Shopping
The key to success is knowing where to look.

Unlock Savings With These Little-Known Credit Card Benefits
You could have purchase protection.

Looking for Recession-Proof Stocks? Find the Outperformers
Some are tried and true.

7 hacks you need to survive tax season
These tips will help get you through in one piece.

Filed Under: Liz's Blog Tagged With: outperformers, stock market, tax season, tips, used car shopping

How ‘maximizers’ can cut decision-making angst

June 24, 2020 By Liz Weston

No one wants to waste money, but some of us go overboard trying to get the best possible deal.

I have spent nearly as much time researching which hiking socks to buy as I have choosing a new car. Others of my species — we’re called “maximizers” — might miss locking in a good mortgage interest rate while waiting for a better one. Our determination to make the optimal choice means we’re often plagued by buyer’s remorse as well as decision paralysis.

Maximizers are the polar opposite of “satisficers,” people who make decisions once they’ve found an acceptable choice. Maximizers’ high standards mean we often get better outcomes, such as jobs that pay more, says financial therapist Kristy Archuleta, associate professor of financial planning at the University of Georgia. In my latest for the Associated Press, how maximizers can reduce their decision-making angst.

Filed Under: Liz's Blog Tagged With: maximizeres, satisficers

Tuesday’s need-to-know money news

June 23, 2020 By Liz Weston

Today’s top story: How to bank when you can’t go to the bank. Also in the news: Don’t fall for COVID-19 student loan relief scams, file your claim in the Yahoo data breach settlement by July 20, and how to hire a financial advisor who won’t rip you off.

How to Bank When You Can’t Go to the Bank
The pandemic has made in-person banking complicated.

Don’t Fall for COVID-19 Student Loan Relief Scams
Scammers are charging for free information.

File Your Claim in the Yahoo Data Breach Settlement by July 20
But don’t get too excited about the amount.

How to Hire a Financial Advisor Who Won’t Rip You Off
Trusting the right advisor.

Filed Under: Liz's Blog Tagged With: banking, Coronavirus, financial advisors, scams, Student Loans, Yahoo data breach settlement

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