Can I take Hardship Withdrawals from my 401k?

10 09 2013

Jonathan N. Castle, MSFS, CFP

Jonathan N. Castle, MSFS, CFP

We recently had a question from a client about taking hardship withdrawals from his retirement plan. Essentially, the question was – what are they, and how do I do it? So, here is the answer we gave:

First, if you are past age 55, and are NO LONGER working for your employer – AND you have not taken the 401k and rolled it into an IRA – then you can make withdrawals from that account without the normal 10% early withdrawal penalty that typically accompanies these accounts. This is a special rule for qualified retirement plans and does not apply to IRA’s. In fact, if you roll the money to an IRA, you lose this provision and have to wait until age 59 and 1/2.

First – you must know that employers are not REQUIRED to offer hardship withdrawals – but usually they do because the plans are often “turnkey” and this feature is built in to turnkey plans. So, if you are still employed and need money from your employer retirement plan – then the simplest answer is that each plan usually has a feature to accomplish this. In many plans, you go onto the plan website, and look for “loans or withdrawals” and merely follow the procedure. If your employer plan does not have a website, or the website does is not set up to facilitate these online, then you probably have to complete a form with your HR department and/or the plan sponsor. You must certify that the Hardship withdrawal is for a purpose that falls within the allowable rules:

To buy a primary residence
To prevent foreclosure of eviction from your home
To pay college tuition for yourself or for a dependent
To pay un-reimbursed medical expenses for yourself or a dependent

Now there are also “exceptions” that do not fall into the hardship withdrawal category. They are literally as they sound – “exceptions” to the 10% penalty:

Disability
Death
Medical debt for expenses that exceed 7.5% of your AGI
A court order for alimony or child support
You set up “substantially equal payments” for your life expectancy.

This last one – substantially equal payments – apply to IRA’s too, and are known as 72t distributions. Do not try to set this up yourself, consult with a CPA or a CFP because they are complex and the penalty for messing it up is quite harsh.

I hope this gets you onto the right path. Good luck with the obstacles you are facing!

Jon Castle
http://www.Wealthguards.com

This blog is for informational purposes only. This is neither an offer to purchase nor sell any securities. All investing involves the potential of loss – including invested principal. Indices quoted are general barometers of security price movement. You cannot invest directly in an index. All information is obtained from sources deemed reliable but not guaranteed. Past performance is not a guarantee of future performance. No tax or legal advice is given nor intended.

Investment advisory services provided by Paragon Wealth Strategies, LLC, a registered investment advisor.

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256 (904) 861-0093 http://www.WealthGuards.com

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements

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A Valuable Tip for the Business Owner

13 12 2012

Jon Castle, CFP, ChFC

Jon Castle, CFP, ChFC

As the end of the year approaches, it can be easy to become swamped with end of the year tasks. We look at that calendar almost daily, mentally ticking off that ever growing “to-do” list of things that we need to get done by the end of the year. I won’t even go into creating a list of examples; I’m sure that if you are a business-owner, that list has already popped into your head and you are populating it even as you are reading this article.

I would ask that, once things settle down a bit – maybe even after the New Year – that you take off your “employee” hat and put on your “owner hat” just for a little while. No – I mean really take off the “employee hat.” Learn to think of your business as a Chinese puzzle or a Rubik’s Cube that you can hold in your hand. You own your business. It is a widget, a device, a tool, a construct of your own making that you must tinker with, work on, improve, re-engineer and tweak until you get it right. Why bother? Because some day – maybe not today – but someday in the future – you will hand that widget to someone else. Maybe… just maybe… if you solve the puzzle… if you do it right… someone will hand you a size-able chunk of money for that widget as you move on with your life.

This perspective of ownership takes a while to develop – but is one of the distinguishing characteristics of those successful entrepreneurs who truly get rewarded and compensated for the time and effort that goes into building a business. A business owner who eventually retires and sells a splendidly crafted business can enjoy a retirement that most never even dream of. A young entrepreneur who creates or acquires a business, cultivates it to perfection to the degree that it is purchased for a handsome sum… creates a life for herself that few others can even imagine.

How does one do this? Ultimately the key is working on the business instead of just in the business. We’ve all heard the same old mantra about creating business plans, setting goals, creating milestones, etc., etc., etc. This is not what I’m talking about. What I’m suggesting that you do is spend the time figuring out how to make you, the business owner,– and your most valuable and experienced employees, expendable within the business.

“What?” you may initially scream? “Me expendable?” Yes, that’s exactly what I mean. If your business relies upon your experience… your relationships… the collective knowledge that only you and your most experienced employees have… then you do not have a business. You have a job. You have a gang, a group, a team of people working together to get things done. This is not bad; quite the opposite. However, you do not have a Rubik’s Cube that you can perfect and then turn to someone else and have them buy that product. Essentially, you have a job.

Ideally, business are the most sell-able (and the most valuable) when they run themselves and the owner is not critical to the successful functioning of the business. When an owner can hire someone off the street, with only a little training, to fill the human needs of the business, and have the business continue to function at a high level of efficiency – then the business has inherent, proprietary value and can itself be sold as a product. When procedures are documented, and automated workflows exist within the business, so each task necessary is performed, tracked, and documented, in the proper order, by the right person, at the right time… so the service or product the business produces gets done. Ideally… without the owner being critical to that cycle.

Is this possible within your business? If not… how can it get that way? Set as a New Year’s resolution to deeply think about the way your business would operate… if you weren’t there. Impossible? Maybe. But maybe not. Or maybe you could get halfway there. Set a New Year’s resolution to start thinking that way. You might be surprised at what your business looks like by the end of next year!

Jon Castle

http://www.WealthGuards.com

This blog is for informational purposes only. This is neither an offer to purchase nor sell any securities. All investing involves the potential of loss – including invested principal. Indices quoted are general barometers of security price movement. You cannot invest directly in an index. All information is obtained from sources deemed reliable but not guaranteed. Past performance is not a guarantee of future performance. No tax or legal advice is given nor intended.

Investment advisory services provided by Paragon Wealth Strategies, LLC, a registered investment advisor.

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256 (904) 861-0093 www.WealthGuards.com

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements





Meet Little Johnny – Your NEW Business Partner!

5 06 2012

Jonathan N. Castle, CFP®, ChFC

Steve and John had been friends for a long time. They were the best of friends since the fourth grade when Steve had helped John face down the school bully. They had played high school basketball together, gone to college together, and had even proposed to their future wives on the same night. Soon after, they went into the heating and air conditioning business together – an “Even Steven” partnership, they called it.  Steve, as
president and COO,  ran the crews and supervised the contractors while John, as CEO, pounded the pavement for business and coordinated the jobs.

Over the years their business grew. Before long they had 12 crews dispatched every day.  John’s business acumen and sales skills had the company’s services in high demand, and Steve’s people skills and work ethic kept customers loyal and crews productive. After 22 years, the business was worth 4 million dollars and generated revenues of over a million and a half dollars a year.  Then Steve and his wife were killed in a car accident by a drunk driver.

John was crushed – in addition to losing his best friend, he had also lost a huge part of his business and livelihood – the man who made things happen where the rubber met the road. Sure, there were good men on the crews, and with some training, one of them might be able to step up and shoulder some of the burden of being the big boss, but it would take months – even years – to train a replacement.

John sat in his office, head buried in his hands. There was a knock at his door, and in stepped what was to become his worst nightmare: Steve’s son Johnny. Johnny, John’s own namesake, was a 20 year-old high-school dropout with a known drug problem and expensive tastes. With a sinking sensation that bordered on nausea, John realized he was looking at his new business partner. As 50% owner of their joint business, Steve’s entire stake in their business now belonged to his only son – Johnny.

In the months that followed, Johnny did little to help the business other than demanding 50% of all revenues generated. Feeling he wasn’t getting enough money, and with little understanding of economics, he soon inserted himself into every business decision, from hiring to firing to bidding for contracts. Soon, loyal crews began departing to the competition.  No-show rates of employees skyrocketed.  The work that actually did get completed was rarely finished on time and rarely passed inspection.  Before long, the company was barely surviving – hanging on by a thread as it fought tooth and nail for each piece of business it landed.

Why did this happen? Was it fate? Hardly. Steve and John had simply made the same mistake that many business owners do – failing to realize their own vulnerability. With simple planning, the destruction of the business could have been avoided. Granted, nothing short of clairvoyance could have avoided Steve’s death in a car accident – but some simple business succession planning would have gone a long way to keeping the
business strong and viable during the months following Steve’s death.

All closely held businesses should consider business succession planning. While there are many solutions to a problem such as this, Steve and John would have been well served to create a buy-sell agreement. This agreement, which is a legally enforceable contract, would have given John the ability to buy out Steve’s stake in the business for a predetermined amount should Steve die or become incapacitated, leaving Johnny with no power to influence any business decisions whatsoever.

There are two basic types of buy-sell agreements: a cross-purchase agreement, and an entity purchase agreement. In a cross-purchase agreement, each business partner owns a life insurance policy on the life of the other partner – providing immediate cash with which to buy out the partner’s heirs, such as Johnny. In an entity purchase agreement, the business itself owns the life insurance policies on each partner. Typically, if there are three or more partners, an entity purchase agreement is the most inexpensive option for
all involved.

An additional benefit of this type of business succession planning is that the agreement can be structured in such a way as to allow the owners – through the business – to stuff the policies full of tax-deferred cash values. In the event that none of the partners die – which is usually the case – they can use the cash-fat policies as retirement bonuses or to provide supplemental income and tax-free death benefits to their families once they ultimately enter retirement.

Given Steve’s role in the business, it would also have made sense for the business to own a “key man” insurance policy on Steve’s life. In this case, had this protection been available, John would have had enough money to immediately search for, and probably recruit, an experienced foremen already performing Steve’s critical duties in another company. While the insurance would not have mitigated John’s pain of losing his best friend, it would have helped him replace Steve’s business skills in a relatively short
period of time.   While the premiums for the insurance policy would not have been taxdeductible
to the business, the death benefit would have been received tax free by the company.

As business owners, our businesses are often a large part of who we are.  The sacrifices every business owner makes to create and nurture a successful business are great – too great to have the results of those sacrifices disappear in a moment by failure to plan. Please consult with your financial planning professional on the steps necessary to protect and preserve what may well be your biggest legacy – your business.

Jon Castle

http://www.WealthGuards.com

This blog is for informational purposes only.  This is neither an offer to purchase nor sell any securities.  All investing involves the potential of loss – including invested principal.  Indices quoted are general barometers of security price movement.  You cannot invest directly in an index.  All information is obtained from sources deemed reliable but not guaranteed.  Past performance is not a guarantee of future performance.  No tax or legal advice is given nor intended.

Investment advisory services provided by Paragon Wealth Strategies, LLC, a registered investment advisor.

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256   (904) 861-0093  www.WealthGuards.com  Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements





How can I protect my 401(k) from the European Debt Crisis?

25 04 2012

Jon Castle, CFP, ChFC

What a question, huh?  This question seems to be on the minds of many investors these days.

Most economists are predicting that the European zone will suffer a period of slower than usual growth – or even short periods of shallow recession – as they try to work their way out of the debt crisis that they are currently in. Since we are, in reality, a global economy, this means that markets both here and abroad will likely be volatile and moderately stagnant for the next several years. It may well feel like we take 3 steps forward in the market, only to be followed by 2 steps backwards – for a while.

Morgan Stanley did a wonderful study called “The Aftermath of Secular Bear Markets” in which the authors of the study tracked the 19 major bear markets over the last century (only 4 were in the US). All major bear market corrections (defined as a market drop of 47% or greater) were followed by a rebound rally, (2009) then a mid-cycle correction (2010 & possibly 2011), followed by a period of 5-6 years of volatile, sideways behavior, before a new bull market started. So, based upon that historical precedent – we are about 2 years into the sideways part. (if you Google this study, you can read about it directly. Here is a link to see it visually:  Trading Range.  Note that the chart on this link was published in 2009, so the “we are here” mark is has moved 3 years to the right .  It was right on as far as predicting the mid-cycle correction(s) in 2010 and 2011.

The sideways part (the trading range of 5.6 years, on average) is the period of time where the economy heals itself, and goverments try to “unscrew” what went awry in the first place.  This is where we are now.  Likely you see daily evidence of this natural process – Democrats and Republicans squabbling over policy but not really changing anything, the Fed printing money, banks hoarding cash and trying to get their books in order, finger-pointing, governmental gridlocks, and daily predictions of great bull markets or terrible bear markets. While difficult to live through – this is actually part of the NATURAL healing process of a free-market economy. Once you realize where you are in the cycle, then it becomes much easier and far less confusing to stay the course.

So – to answer thequestion – the secret to being a successful 401(k) or other retirement plan investor in which you have to save money over time, and have, say,  10 or 12 or more years to retirement, would be:

1)  Build your portfolio to a risk tolerance that even if the market drops 20 or 30%, you will NOT freak out and will NOT stop investing.  That means you may have to have 30%, 50%, or even 70% of your money in the “safer” investments like government bond funds, or even cash.  A good rule of thumb is – whatever percent of your portfolio you have in the stock market – that is the percent that it will go down when the market corrects. So – if the market drops 20% (which it does every 3 years) – and 50% of your money is in stock funds – then your portfolio will drop by about 10%. (50% of 20% is 10%.)  If you can hang through a drop like that – but no more – and keep investing, then that’s your risk tolerance threshold (limit).  If your personal limit is more like 20%, you can build your portfolio more aggressively – like 70% stock funds, or maybe even a little bit more.  With 10 or 12 years to retirement, you’ve got plenty of time to make it up, so you can afford to be more aggressive.

2) KEEP INVESTING.  When the market goes down – and your portfolio goes down – but you keep investing – you are buying up shares of the funds ON SALE.  If you see a sale at a store – you wouldn’t throw away everything you bought previously, would you?  Then why do people do this with stocks or mutual funds?  If they are on sale – buy more!! Keep buying over time – during that volatile period that I mentioned above – and when the steady bull markets DO come back (they will – we just don’t know when) then you will likely be extremely pleased with your investments.

This blog post is not personal investment, financial, or tax advice.  Please consult your financial professional for personal, specific information.  Indexes mentioned are a general barometer of the stock or bond market they represent.  You cannot invest directly in an index.  Past performance is no guarantee of future results.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment adviser. http://www.WealthGuards.com





What’s Your Retirement Number? Higher than You Might Think!

7 09 2011

by Michelle Ash,  CFP®, CDFA™

As I start to write this article, I feel like maybe I should give readers a caution like you see at the start of some TV shows:  “The program you are about to watch contains disturbing images. Viewer discretion advised.”  This message is important!!!, but the telling of it isn’t necessarily going to be pretty.

Recently I have had the opportunity to experience a new phenomena in my career.  In the past couple of months, much by happenstance, our firm has had a number of younger individuals engage our services.  By younger, I mean they are generally of or near my own age demographic:  late 30’s to mid-40’s.  These individuals have generally been contemplating their future retirement, among other financial goals, and have hired us to put together a retirement plan to see how they’re progressing on that path.

Previously, our firm has primarily worked only with individuals ages 50 and above, who are often in what I call the “final chute” towards reaching retirement.

I have long observed the unpleasant circumstances that loom ahead for individuals who have not planned and saved well for retirement.  But since I was usually seeing those individuals at or near the age at which they had hoped to retire, I wasn’t necessarily able to understand what decisions might have led to their current status.

Having the opportunity to work with individuals who are twenty or even more years away from retirement, I can see the habits that cause success, or prevent one from achieving it.  In the process of that observation, I am also noticing an extremely disturbing trend.

The issue is thisI notice a general assumption that contributing the maximum funding to one’s 401(k) plan is all that really needs to be done to fund a retirement.

Now, I realize and agree that for some people, getting to the point where they can actually save $15,500 per year of their salary, the current maximum funding allowed for an employee under age 50, is a fabulous goal in and of itself.

But what bothers me is when I see individuals or couples making $150,000 per year, $200,000 per year, sometimes even more than that, and they think that just maxing their 401(k) is all they really need to do in order to be able to retire at age 60, live a long retirement, and have a lifestyle largely commensurate with that they currently live.

I guess I just have one thing to say to these people:  WAKE UP.  You are living in a fantasy, and if you stay there, the reality you are faced with once you get to retirement is NOT going to be a pleasant one.

Let’s run what I’ll call an “average” desired retirement.  It’s a standard many clients describe to me as “comfortable” but is certainly not lavish by most accounts.

• Retire at age 60
• Have $48,000 per year for expenses and budget needs (in today’s dollars)
• Have their house paid off by retirement
• Dollars for Property taxes, homeowner’s insurance, health insurance, and Medicare supplements are extra expenses above the base $48K
• Spend an extra $5,000 per year on travels or other hobbies while healthy
• Upgrade their vehicle every 7 years or so
• Have enough money to cover emergencies, home repairs, and medical emergencies
• Have enough money to last the rest of life no matter how long that lasts

After factoring in inflation, this scenario results in retirement costing approximately $96,000 in year one and $346,000 in the final year (assuming death at the age of 95).  Imagine if, just like going out to eat where your waiter hands you a final bill at the end of the meal for all of the different courses you ate, someone were to hand you the bill for your retirement at the very end of it.  If someone were to add up year by year the total cost of this retirement, the “number” that would result would be $8,905,800. **(Assumptions are listed below.)

Have you ever seen that commercial where people are walking around carrying their retirement “number”?  I have heard many people say they’ve been frightened by the size of some of the numbers.  Guess what – unfortunately those numbers can be very real!

Fortunately, there is a potential income source to help offset that need:  social security.  (As a sidebar, the cynical Gen X’er in me wants to say “yeah right, like we can count on that!)  We’ll assume there is no pension income, since a majority of Americans today, particularly younger ones, are no longer eligible for corporate pensions.  Using current rules, social security would account for approximately 39% of the overall need mentioned above. **

But that still leaves us over $5 Million dollars of future money needed in retirement that is unaccounted for.  This is not, of course – the “number” that needs to be accumulated prior to retirement, since accumulated dollars will likely earn a return during retirement.  However, it does accurately reflect the total likely cost of retirement – and can give insight to the size of the number which would need to be accumulated prior to retiring.

Let’s assume our hypothetical family has already saved $100,000 in 401(k)’s, which is the average amount we tend to see amongst individuals around age 40.  Solving this equation to determine how much money this family needs to save from this point forward, from age 40 until retirement at age 60, results in needing to fully fund each of their 401(k)’s at $15,500 per year each, PLUS save an additional $1,445 per month, or $17,340 per year.

Is this possible?  Especially if this requires them to save a good bit more than the maximum contribution allowed for most employer plans, it requires getting serious about their financial goals – and doing something about them – or… accepting something less.  Many people don’t like to hear advice like that, but please understand that it is not a judgment – it is just math.

I realize that at this point, some people reading this article might just want to throw in the towel and give up altogether.  As I said earlier, for many people, just getting to the point of contributing the maximum amount to a 401(k) can be a great goal.  I do not mean to diminish that accomplishment.  Ultimately, any savings you do will be better than nothing.  But what I do hope to do is cause people to realize that it takes a lot of hard work and a lot of saving to get to the point of a comfortable retirement.

With that in mind, my general suggestion to people working towards retirement, regardless of age, would be to save, save, and then save a little more.  That, or work with a CERTIFIED FINANCIAL PLANNER™ professional who can help you determine what your actual “number” is, and then make sure you’re doing everything you can to achieve it.

Expense Assumptions: 

  • House is assumed to be paid off prior to retirement.
  • Property taxes and homeowner’s insurance = $5,000 per year, inflating from today at 3.71%
  • Travel/Other Hobbies Budget of $5,000 per year inflates from today at 3.71% and ends at “advanced age” of 82 when many seniors no longer travel or pursue other hobbies as much.
  • Car upgrades begin in year 3 of retirement, occur every 7 years, and cost the equivalent of $20,000 today inflated at 3.71%.
  • Age at death = 95 for both spouses
  • Emergency savings, home repairs, and medical emergencies not accounted for since they are not quantifiable in this fact pattern.

Income Assumptions:

  • Social Security income is drawn at age 62 for both spouses.
  • Benefit amount = $18,960 per spouse, based on earnings that equal or exceed the current earnings cap of $106,800 throughout both spouses’ entire working history for 38 years (age 22 to 60).  (Source:  http://www.ssa.gov)
  • Inflation rate of 2.5% assumed on social security benefits, since Social Security benefits have not historically kept up with the rate of inflation.
  • Both spouses are assumed to live until the age of 95, meaning the family receives both social security incomes throughout retirement.

 Additional Savings Needed Assumptions:

  • Rate of Return = 7% annually.  This 7% is a mathematical figure, is hypothetical, and does not represent the returns of any particular investment or product.  Rate of return is applied to both existing accumulated dollars and future invested dollars.
  • Starting investment assets accumulated equal $100,000 in 401(k) plans.
  • Need reflected ($17,340 per year) is a total additional savings need , above 401(k) contributions of $15,500 per spouse ($31,000 total combined).  Total annual savings needed is therefore $48,340.
  • Investment time horizon:  Age 40 (current age) to age 95 (age at death).
  • Assets accumulated are assumed to be fully invested for the full lifespan of our hypothetical couple.  Both income and principal are consumed to meet retirement needs.

This blog article does not constitute legal, tax, or personal financial advice.  Please consult your own financial professional for personal, specific information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.