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Liz Weston

Q&A: Withdrawing after-tax retirement funds

April 27, 2020 By Liz Weston

Dear Liz: I have been contributing to retirement accounts for many years, starting back in the early 1980s. Back then, there were no deductions for contributions. I made about $50,000 of after-tax contributions, meaning I’ve already paid taxes on that money. Later I switched to before-tax contributions. Now that I am retired and approaching 65, in my feeble mind, I believe I should be able to withdraw that $50,000 without having to pay any taxes on it. However, things that I’ve read indicate that it may not be that easy. Can you help with this question, or at least point me in the right direction?

Answer: You will escape taxes on a portion of any withdrawal you make from a retirement plan that has after-tax money in it, said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. However, only Roth IRAs allow you to make totally tax-free withdrawals of your contributions at any time.

With a Roth IRA, any withdrawals are considered first to be a return of contributions. For example, if you contributed $50,000 to an account that’s now worth $200,000, the first $50,000 you withdraw would be tax- and penalty-free, regardless of your age, Luscombe said. If you were under 59½, additional withdrawals could be subject to taxes and penalties.

With regular IRAs and 401(k)s, the tax treatment is different. Withdrawals are considered to be a proportionate return of your after-tax money, Luscombe said. If you contributed $50,000 after tax and then withdrew the same amount from an account now worth $200,000, only one quarter of the money would escape tax.

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

Q&A: Coronavirus aid law lets you more easily tap retirement savings. That doesn’t mean you should

April 27, 2020 By Liz Weston

Dear Liz: You recently mentioned that a person can withdraw money from their 401(k) and spread the taxes over three years. If 401(k) is paid back, they can amend their tax returns to get those taxes refunded. Because of some major home repairs, I asked our accountant about this before we proceeded. He said that he hasn’t read anything official about the above. Would you please provide where you obtained your information, so we can decide if that’s an avenue we can use?

Answer: It’s possible you had this conversation before March 27, when the Coronavirus Aid, Relief, and Economic Security (CARES) Act became law.

Otherwise, it’s kind of hard to imagine an accountant anywhere in the U.S. who hasn’t heard of the emergency relief package that created the stimulus checks being sent to most Americans, as well as the Paycheck Protection Program’s forgivable loans for businesses and the new coronavirus hardship withdrawal rules for 401(k)s and IRAs.

Those rules allow people who have been affected financially or physically by COVID-19, the disease caused by the novel coronavirus, to get emergency access to their retirement funds if their employers allow it.

Even if you do have access to such a withdrawal, you should consider other avenues first.

The income taxes on retirement plan withdrawals can be substantial, even when spread over three years. Perhaps more importantly, you probably would lose out on future tax-deferred returns that money could have earned because few people who make such withdrawals will be able to pay the money back.

A home equity loan or line of credit is typically a much better option for home repairs, if you can arrange it.

Filed Under: Coronavirus, Q&A, Retirement, Taxes Tagged With: 401(k), CARES Act, Coronavirus, q&a, Retirement, Taxes

Friday’s need-to-know money news

April 24, 2020 By Liz Weston

Today’s top story: How to get cash from your life insurance policy. Also in the news: How to manage your credit score during a crisis, how to tell if your financial advisor is really helping you, and how much a credit card cash advance will really cost you.

How to Get Cash From Your Life Insurance Policy
Four ways to tap into your policy.

How to Manage Your Credit Score During a Crisis
Strategic choices.

Crisis Test: Is Your Financial Advisor Really Helping You?
Are your best interests being put first?

Here’s What a Credit Card Cash Advance Will Really Cost You
Check that APR.

Filed Under: Liz's Blog Tagged With: cash advance, Coronavirus, credit card, Credit Score, financial advisors, life insurance

Thursday’s need-to-know money news

April 23, 2020 By Liz Weston

Today’s top story: Global Entry travelers now have an 18-month renewal grace period. Also in the news: College students can get more aid during the Coronavirus crisis, 4 ways to travel cheaply during an economic downturn, and choose a student loan repayment program with this calculator.

Global Entry Travelers Now Have an 18-Month Renewal Grace Period
An extended renewal period due to COVID-19.

College Students Can Get More Aid During the Coronavirus Crisis
Three ways to find help.

4 Ways to Travel Cheaply During a Recession
Traveling during an economic downturn.

Choose a Student Loan Repayment Plan With This Calculator
Finding the plan that works best for you.

Filed Under: Liz's Blog Tagged With: calculator, college assistance, Global Entry. travel, Student Loans, tips

Wednesday’s need-to-know money news

April 22, 2020 By Liz Weston

Today’s top story: What to do if you can’t pay for insurance due to Coronavirus. Also in the news: 3 effective ways to get airlines and hotels to bend their rules, a new episode of the SmartMoney podcast on spring cleaning your finances, and what the CARES Act means for public service student loan forgiveness.

What to Do if You Can’t Pay for Insurance Due to Coronavirus
Get in touch with your carrier immediately.

3 Effective Ways to Get Airlines and Hotels to Bend Their Rules
Twitter vs. phone vs. email.

SmartMoney Podcast: ‘How Should I Spring-Clean My Finances?’
Three steps to tidy things up.

What the CARES Act Means for Public Service Student Loan Forgiveness
Document everything.

Filed Under: Liz's Blog Tagged With: airlines, CARES Act, Coronavirus, hotels, Insurance, public service student loan forgiveness, SmartMoney podcast, spring cleaning, tips, travel changes

Tuesday’s need-to-know money news

April 21, 2020 By Liz Weston

Today’s top story: What to know before accepting COVID-19 credit card relief. Also in the news: You can now get free weekly credit reports, how to get money to family and friends in a crisis, and what your small business should do with its Paycheck Protection Program loan.

What to Know Before Accepting COVID-19 Credit Card Relief
Beware the fine print.

You Can Now Get Free Weekly Credit Reports — Here’s How to Use Them
Keeping a close eye on your credit.

How to Get Money to Family and Friends in a Crisis
Watch out for fees.

Your small business got a Paycheck Protection Program loan. Now what?
The best ways to strategize.

Filed Under: Liz's Blog Tagged With: Coronavirus, COVID-19 credit card relief, Credit Cards, Credit Reports, lending money, paycheck protection program loan, small business

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