dsmWealth: April 18, 2024

How to avoid penalties for early 401(k) withdrawals
BY STEVE DINNEN

Every year, Americans pour hundreds of billions of dollars into 401(k) retirement savings plans. And every year, they pay Uncle Sam $6 billion in penalties and fees because they’ve tapped into those accounts too early, at age 59 1/2.

You always have to pay taxes on a 401(k) withdrawal. (In this discussion, we’re also including 403(b) and 457 plans.) But if you’re younger than 59 1/2, you can avoid an early withdrawal penalty if you cite a qualifying reason. Valid reasons can include an expansive range of expenses, such as medical bills, a disability, qualifying higher education, health and insurance premiums, adoption costs and disaster recovery. New this year: Suffering from domestic violence within the past 12 months can also qualify as a reason to withdraw funds early.

Oh — and IRS levies are always a qualifying reason.

But what if none of that works? Well, then try out Rule 72(t). It allows penalty-free withdrawals from retirement accounts but comes with some major restrictions. While avoiding the 10% penalty, you still owe income taxes on distributions. Payments are fixed for at least five years and can't be changed without a penalty. You lose tax-deferred growth and can't contribute anymore.

Keith Gredys, who co-founded Kidder Advisers in Urbandale, said he’s seen clients use 72(t) when they’ve accumulated significant funds in their IRAs and are between jobs or need additional income to cover family expenses. Also, sometimes they want to retire before 59 1/2.

The 72(t) exception “has been around for a long time and can be an effective tool for income planning prior to age 59 1/2,” Gredys said. But it’s not used a lot because it’s complex, limited and relatively unknown.

The 72(t) rule mandates that distributions must be a series of equal periodic payments over the life expectancy of the taxpayer or designated beneficiary. You can’t modify the payout (except in cases of death or disability) before the date the taxpayer reaches 59 1/2 or the fifth anniversary of the first payment, whichever comes later.

There are three different ways to get the payout. One is the required minimum distribution (RMD), like the method you would use once you normally begin to take payouts once you clear age 59 1/2. You just make your calculation once per year using the end of the prior year’s balance.

For financial, tax and cash flow planning, Gredys said 72(t) is a great tool when used correctly and monitored.

US housing prices are still high, but more affordable in Iowa
BY STEVE DINNEN

Housing has gotten more expensive, by a lot. In just the past four years, calculations by Bankrate.com show that it takes 39.9% more money to afford a median priced home in Iowa.

As of January, you’d need an annual salary of $65,314 to afford that home, compared to just $46,678 four years earlier. Bankrate pegged the median sale price of an Iowa home at $223,500.

That’s relatively good news, since its review of all 50 states showed that an Iowa home is cheaper than nearly any other place in the nation. All neighboring states post higher sale prices than Iowa, and all require a higher annual income to afford one of those homes. At the high end of the scale is California, where it takes $191,057 to afford a median-priced home at $739,000. The lowest state is Mississippi, where it takes $63,043 to afford a median-priced home at $232,800.

Nationally, the median price of a home is now $402,343, requiring an annual income of $110,871. That’s 45.5% than four years ago.

Just for laughs, I happened to scan a news story from Monday’s edition of the Toronto Star that featured a one-bedroom bungalow in that city and listed its selling points (a red roof! two baths and a shower!). In that neighborhood, it was an “entry-level” price at $723,000.

The average price of a stand-alone Toronto home is currently $1,235,000.

Take control of your money during Financial Literacy Month
BY CRAIG RUBINO FOR KIPLINGER

April is Financial Literacy Month, which is a great time to revisit your finances, learn more about your choices and make sure you’re making the most of your workplace benefits. While money management can feel overwhelming — especially amid an uncertain economic environment — it’s important to invest in your financial confidence and more clearly map out how every piece of your financial puzzle fits together.

No matter what your financial situation is today, there are steps you can take to help you prepare for the unexpected. Taking care of your finances can help relieve stress, provide peace of mind and set you up on a path to build a more secure financial future.

Review spending and create a budget

The first step to enhance financial know-how is to understand where your money is going. Review your income sources, debt payments, credit cards and bills. Use online tools such as debt calculators, retirement calculators and budgeting apps, which can help you track your monthly income and expenses. Your workplace benefits may include tools like these that you can use. Typically, you can also create a budget through your credit card app.

Next, separate fixed and variable expenses — this would be crucial payments like rent vs nice-to-haves such as going out to dinner. One popular method is the 50-30-20 budgeting rule: 50% of your budget would cover needs, 30% wants and 20% savings and investments. Break it down by month, paycheck or whatever makes the most sense for your lifestyle.

Read two more practical tips in the full story, right here.

Your tax refund is delayed. It could be years.
BY ASHLEA EBELING FOR THE WALL STREET JOURNAL

Taxpayers waiting for a refund check usually get their money within 21 days of filing a return. The unlucky ones can sometimes wait years.

Refunds can be delayed when computers at the Internal Revenue Service flag a return for a variety of reasons. There might be an error, inconsistency or indication of possible identity theft that requires a human to check it. Taxpayers might not get an explanation.

Chris Horan is on month 13 of waiting for his roughly $30,000 refund from tax year 2022. Since his accountant filed his return last March, he regularly checks the Internal Revenue Service’s Where’s My Refund site. The message is always the same: “We have received your tax return and it is being reviewed.”

Horan, 42, head of sales for a financial-services software company in Virginia Beach, Virginia, said he and his accountant have both called the IRS. The representatives keep suggesting to try again in another 60 days.

Read the rest of the story here.