Want to tap into your retirement money? Where you hold the funds can determine whether you get hit with an early withdrawal penalty. Some people are better off siphoning cash from a 401K; while others should look into an IRA.
You usually owe income tax when you take money out of an IRA or 401K. And you probably will owe a 10% penalty if you withdraw before age 59 ½. Suppose a hypothetical 50 year old sets up a consulting business, but his pay is lower then what is required to pay is bills. Now he needs to tap his retirement fund to cover expenses. One option is to leave the money in his former employer’s 401K, then make withdrawals; but because he is under 59 1/2, he will be hit with the early withdrawal penalty.
If the 50 year old in the 25% tax bracket, the tax will cost him the 25% in tax plus the 10% penalty for a total of 35% on retirement fund withdrawals. That is the rate paid by the highest bracket taxpayers, therefore, the 50 year old would like to avoid the 10% surtax.
If the money is still in a 401K, there is no penalty, as long as, the account owner left the company after his or her 55th birthday, said Natalie Choat, an attorney with a Boston law firm. In fact they would be exempt from the 10% surtax if the separation from service was due to retirement, lay off, firing or quitting occurred any time during or after the calendar year in which he reached age 55. But our sample taxpayer is only 50 years old, therefore he would owe the 25% in tax and the 10% penalty on the withdrawal.
There are some reasons to keep money in the 401K, even if you leave the company before age 55. Payments to a spouse or a former spouse under a qualified domestic relations order in a divorce or separation avoid the surtax, coming from a 401K.
Another option for the 50 year old is to roll the 401K account at his former work place to an IRA. Some exceptions to the early withdrawal penalty apply to IRAs but not to 401K plans. One IRA exception is for first time homebuyer. That is someone who has not owned a home that he used as his principal resididence for the previous 2 years.
Our 50 year old could take out up to $10,000 for a home he would occupy as his principal residence. He also can withdraw the money and give it to his wife, child, grandchild or parent who is making a qualified home purchase, or any combination of those people. The $10,000 is a lifetime cap; so, if our 50 year old takes $4,000 from his IRA to help his son buy a home, he also can take $6,000 to help his daughter buy one. If both purchases qualify, there will be no penalty.
The wife can take out up to another $10,000 penalty free and give it to one or more qualified recipients. To avoid the surtax, the money must be used to buy or build a home within 120 days of the withdrawal. But our 50 year old does not plan to buy a home or help anyone else buy a home. So this exception will not help. The 50 year old can use another exception available to IRAs. That applies to outlays for higher education. So, suppose the 50 year old has two children in college this year. He expects to pay $30,000 for schooling in 2009. The 50 year old can withdraw up to $30,000 from his IRA this year and avoid the early withdrawal surtax. The money has to be spent at an accredited school. Expenses that count toward the penalty exception are those from tuition, fees, books, equipment and supplies. For students who are enrolled at least half time, penalty free withdrawals also are permitted for room and board. The student can be the IRA owner himself, the IRA owner’s spouse, child or grandchild, or any combination thereof.
An IRA rollover also makes sense if you lose a job and plan to go back to school to enhance your career prospects. If you have lost a job, you might benefit from another exception to the 10% surtax. This exception applies to health insurance premiums. You can withdraw IRA money to pay those premiums while you are unemployed, penalty free. To qualify, you must have received unemployment compensation for at lease 12 consecutive weeks. The penalty free withdrawals can be made in the year that unemployment compensation was received or in the following year.
That may be another reason to roll 401K money into an IRA if you leave the company before age 55. If you expect a long period of unemployment and substantial outlays for health insurance, you can take penalty free withdrawals from an IRA but not from a 401K. So the reason you may withdraw funds can dictate where you should hold your retirement funds. Usually, plans do not let members roll 401K assets to an IRA while they still work for the company.
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This intellectual property is of general nature and should not be acted on without professional guidance. So if you know someone that is looking for a way to save taxes and avoid the IRS, call us at 702-642-8953 or write me at isueirs@aol.com. No Restrictions. No Conditions. No Time Limit. No IRS.
Saturday, July 11, 2009
Saturday, July 4, 2009
WHAT IS YOUR BUSINESS WORTH?
When valuing a business, the main element is the future income. One method to consider is the "Three Year Weighted Average." This approach uses three years to provide credibility, yet it puts the most weight on the immediate past year.
First you must adjust the three prior year profit and loss statements to allow for proper compensation for the owner, and to eliminate family expenses that may have crept into the company expenses. Now, multiply the profit or loss for the immediate past year by three; the second year old net figure by two; and the third year old figure by one.
Total your three answers and divide by six. You now have the "weighted average" for the prior performance with the greatest weight being applied to the immediate past year.
Divide the weighted average profit by your desired percentage return. This will provide you with a rought guideline as to the value of the business. Remember, you adjusted the profit and loss figure before you started your computation to allow for a proper return on the proprietor's time.
The investor who is happy with an eight percent return would be willing to pay a higher price for a business than an investor who demands a twelve percent return. Some buyers are satisfied with a lower rate of return on their investment, if they are also securing a full-time self-employment position.
Ultimately the business is valued on the amount of money it's expected to generare for the owner, as well as its associated risks. A way to measure these risks is to examine the business' cash flow or expected income. The general formula is that a business' selling price should be three (3) to five (5) times its cash flow, with the higher end being more appropriate for a bigger business. Therefore, if the firm produced a net profit of $100,000 last year, you might expect to buy it for $300,000.
Remember, though, these are just generalities and they don't account for the risks of an individual business, says Rick Shaffer, an Aurora, Ill business broker. Specific economic factors affecting your industry can change the valuation. For example, if you were buying a business that schedules Asian tours, the value of the firm could be affected by how the dollar is expected to perform.
That is why it is worth hiring a professional valuator; in fact, your lender may even require you to do so. A valuator can fully analyze all the conditions affecting the specific business. And the valuator will have information about the amount that other similar businesses have recently listed and sold for. This data isn't public, but certain agencies track sales and appraisers subscribe to their services.
Your business broker or accountant can usually point you toward a valuator. Expect to pay an hourly fee for the person's services, but it is well worth every penny.
CALL ON US
This intellectual property is of general nature and should not be acted upon without professional gudiance. So if you know of someone that is looking for a way to save taxes and avoid the IRS call me at 702-642-8953 or write us at isueirs@aol.com. No Exceptions. No Conditions. No Time Limits. No IRS.
First you must adjust the three prior year profit and loss statements to allow for proper compensation for the owner, and to eliminate family expenses that may have crept into the company expenses. Now, multiply the profit or loss for the immediate past year by three; the second year old net figure by two; and the third year old figure by one.
Total your three answers and divide by six. You now have the "weighted average" for the prior performance with the greatest weight being applied to the immediate past year.
Divide the weighted average profit by your desired percentage return. This will provide you with a rought guideline as to the value of the business. Remember, you adjusted the profit and loss figure before you started your computation to allow for a proper return on the proprietor's time.
The investor who is happy with an eight percent return would be willing to pay a higher price for a business than an investor who demands a twelve percent return. Some buyers are satisfied with a lower rate of return on their investment, if they are also securing a full-time self-employment position.
Ultimately the business is valued on the amount of money it's expected to generare for the owner, as well as its associated risks. A way to measure these risks is to examine the business' cash flow or expected income. The general formula is that a business' selling price should be three (3) to five (5) times its cash flow, with the higher end being more appropriate for a bigger business. Therefore, if the firm produced a net profit of $100,000 last year, you might expect to buy it for $300,000.
Remember, though, these are just generalities and they don't account for the risks of an individual business, says Rick Shaffer, an Aurora, Ill business broker. Specific economic factors affecting your industry can change the valuation. For example, if you were buying a business that schedules Asian tours, the value of the firm could be affected by how the dollar is expected to perform.
That is why it is worth hiring a professional valuator; in fact, your lender may even require you to do so. A valuator can fully analyze all the conditions affecting the specific business. And the valuator will have information about the amount that other similar businesses have recently listed and sold for. This data isn't public, but certain agencies track sales and appraisers subscribe to their services.
Your business broker or accountant can usually point you toward a valuator. Expect to pay an hourly fee for the person's services, but it is well worth every penny.
CALL ON US
This intellectual property is of general nature and should not be acted upon without professional gudiance. So if you know of someone that is looking for a way to save taxes and avoid the IRS call me at 702-642-8953 or write us at isueirs@aol.com. No Exceptions. No Conditions. No Time Limits. No IRS.
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