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How can you follow the rules when the rules keep changing?

In the world of financial planning, if you don’t have knowledgeable, reliable professionals on your side, you really have to keep your eye on the ball. I’m talking about financial and tax advisors, and you can even add attorneys to the list.

I say this because our elected officials continually change rules and then create exceptions to the rules to complicate matters even further. Add an election just around the corner with candidates wanting to modify existing rules and income tax rates and you’ve got what the Temptations called a Ball of Confusion.

With so many parts constantly changing, it makes long-term financial planning very difficult. That’s why, whenever I present long-term financial projections, I always point out that the farther you plan into the future, the fuzzier the numbers become. It’s also why plans need to be reviewed an updated periodically.

People over the age of 70 should be familiar with required minimum distributions (RMD). In a nutshell, the RMD requires that a portion of your IRA and other retirement plans has to be withdrawn every year. And, of course, taxes must be paid on the distribution.

For the 2020 tax year the rules were changed. Instead of 70, you weren’t required to make an RMD until age 72. But earlier this year, because of COVID-19, that rule was suspended for 2020. Mandatory distributions for retirees are not required this year.

For younger people with retirement programs, there’s a 10 percent penalty for withdrawals made prior to age 59½. But there’s a laundry list of exceptions for that rule as well.

For example, with both IRA and retirement plans there are special rules for Corona virus distributions. If you were adversely impacted by the Corona virus, many plan administrators allow you to withdraw up to $100,000 without penalty.

Of course, you still have to pay income taxes on those withdrawals. If you choose to pursue this route, you can ultimately avoid taxes on your distribution by re-contributing the money within three years of the withdrawal. Other exceptions to the 10 percent penalty allow withdrawals for medical expenses, disability, death and for military reservists. Then there’s my favorite: withdrawals used to pay for IRS levies.

Please keep in mind that for each of these exceptions, detailed rules must be followed in order to be in compliance. With medically related withdrawals, for example, the expenses must exceed 7.5 percent of your adjusted gross income.

For IRA accounts there are a few other exceptions. First-time homebuyers can withdraw up to $10,000 penalty free. You can also make penalty-free withdrawals for higher education. And if you become unemployed, you can withdraw without penalty to pay for health insurance premiums. The bottom line is that, if you look hard enough, you can often find exceptions to the rules.

In a perfect world you should never have to touch your retirement dollars until you are actually retired. But if life throws you a curve ball, there may exceptions to the rules that allow you to avoid early withdrawal penalties. If you seek to find those exceptions, I strongly suggest a thorough review with your tax professional before actually taking any distributions.

Our rules continually change and frequently modified, making it difficult for long-term financial planning. It’s okay to ask for help.

Know Someone?

E-mail your questions to kenmorris@lifetimeplanning.com 
Ken is a registered representative of LPL Financial. Securities and financial planning offered through LPL, a Registered Investment Advisor, member FINRA/SIPC. Ken is Vice-President of the Society for Lifetime Planning in Troy. All opinions expressed are those of Ken Morris. LPL and Society for Lifetime Planning are independent companies. Investing involves risk including loss of principal. No strategy assures success or protects against loss.