Posts Tagged ‘Other lessons’

ETF's, a mutual funds cute sister

In 2008 the SEC (Securities and Exchange Commision) started to allow actively managed ETFs, or exchange traded funds (which act like stocks and bonds with regards to options and trading), hence the reason for my writing this article. Without the opportunity for investment managers to make money off you, those same managers probably wouldn’t talk about this fund that has been available since the early ninties. More or less, ETF’s are the exact same thing as mutual funds, however, ETFs have the ability to be traded anytime during the trading day, while mutual funds can only trade at the end of the day.

Here are a few key reasons ETF’s are cuter than mutual funds:

1. They are less costly than mutual funds (less fees generally)
2. They give you the ability to trade in live time, instead of having to wait until the end of the day like mutual funds.
3. They provide lower taxes because of lower turnover.
4. They provide more transparency so you know what you are actually investing in.

Here is a list of ETFs.

How can I withdrawal from my IRA and not pay a 10% penalty

The day you turn 59 and 1/2 years old, the IRS allows you the pleasure of accessing your invested savings penalty free. But what if you need that money before and you can’t afford the 10% early withdrawal penalty? No problem, with the 72(t) and 72(q), the IRS allows you to make extended, regular withdrawals penalty free. The key here is, you have to make the exact same withdrawal (with very little exception) or the IRS will slap you with the penalty along with additional interest and fines for not abiding by their rules.

Below is an example of calculating the withdrawals from the IRS’ website:

How are annual, substantially equal periodic payments determined for purposes of the required minimum distribution method, the fixed amortization method and the fixed annuity method?

An example of the required distribution method, an example of the fixed amortization method and an example of the fixed annuity method using the methodologies described in Rev. Rul. 2002-62 are set forth.

Facts:

Mr. B is the owner of an IRA from which he would like to start taking distributions beginning in 2003. Mr. B will celebrate his 50th birthday in January 2003. Mr. B would like to avoid the additional 10% tax imposed on early distributions under section 72(t)(1) by taking advantage of the exception in section 72(t)(2)(A)(iv) for distributions in the form of substantially equal periodic payments.

Assumptions:

the account balance of Mr. B’s IRA is $400,000 as of December 31, 2002, and this is the account balance (and, when applicable, the date as of which the account balance is determined) used to calculate distributions.
120% of the federal mid-term rate for the appropriate month is assumed to be 4.5% and, when applicable, this is the interest rate that will be used for calculations.
distributions will be over Mr. B’s life only and, where applicable, single life expectancy will be used for calculations.
1. Required minimum distribution method

For 2003, the annual distribution amount ($11,695.91) is calculated by dividing the December 31, 2002, account balance ($400,000) by the single life expectancy (34.2) obtained from Q&A-1 of § 1.401(a)(9)-9 of the Income Tax Regulations when an age of 50 is used.

$400,000/34.2 = $11,695.91

For subsequent years, the annual distribution amount will be calculated by dividing the account balance as of December 31 of the prior year by the single life expectancy obtained from the same single life expectancy table using the age attained in the year for which distributions are calculated. For example, if Mr. B’s IRA account balance, after the 2003 distribution has been paid, is $408,304 on December 31, 2003, the annual distribution amount for 2004 ($12,261.38) is calculated by dividing the December 31, 2003 account balance ($408,304) by the single life expectancy (33.3) obtained from Q&A-1 of § 1.401(a)(9)-9 of the Income Tax Regulations when an age of 51 is used.

$408,304/33.3 = $12,261.38

2. Fixed amortization method

For 2003, the annual distribution amount will be calculated by amortizing the account balance ($400,000) over a number of years equal to Mr. B’s single life expectancy (34.2) (obtained from Q&A-1 of § 1.401(a)(9)-9 of the Income Tax Regulations when an age of 50 is used), at a rate of interest equal to 4.5%. If an end-of-year payment is calculated, then the annual distribution amount in 2003 is $23,134.27. Once an annual distribution amount is calculated under this fixed method, the same amount will be distributed under this method in subsequent years.

3. Fixed annuitization method

Under this method the annual distribution amount for 2003 is equal to the account balance ($400,000) divided by the cost of an annuity factor that would provide one dollar per year over Mr. B’s life, beginning at age 50 (i.e., the actuarial present value of an annuity of one dollar a year payable for the life of a 50 year old). The age 50 annuity factor (17.462) is calculated based on the mortality table in Appendix B of Rev. Rul. 2002-62 and an interest rate of 4.5%. Such calculations would normally be made by an actuary.

The annual distribution amount is calculated as

$400,000/17.462 = $22,906.88

Once an annual distribution amount is calculated under this fixed method, the same amount will be distributed under this method in subsequent years.

——————————————————————————————–

Here is a cool calculator to help you figure out your early withdrawals.

Please, consult a professional before doing this on your own, to make sure you are doing this correctly, this article is for informational purposes only and should not be used in your decision making.