Author: Leon Clinton

The government does not want you to withdraw money from your IRAs and other retirement accounts before age 59 1/2.

To deter early withdrawals, the government imposes a 10 percent penalty tax, in addition to regular income tax in the case of tax-deferred accounts.

But what if you want to access your retirement funds before age 59 1/2?

You could be in luck. Over the years, Congress has created numerous exceptions to the penalty. And then, in late 2022, the SECURE 2.0 Act added even more ways to withdraw money penalty-free.

Here are the main exceptions in place before the SECURE 2.0 Act.

No penalty will ever be due on early distributions from your 401(k) or other qualified plans if you leave your job the year you turn 55 or later. But this exception does not apply to IRAs (traditional, Roth, SEP, or SIMPLE IRAs).

Here’s a major exception relatively few people take advantage of: You can withdraw funds penalty-free from your IRA before age 59 1/2 if you take substantially equal periodic payments for at least five years or until you turn age 59 1/2. You calculate this under the assumption that you will withdraw your entire retirement plan either throughout your life or throughout the lives of you and your beneficiary.

There are various ways to calculate your withdrawals. It can get complicated. Also, for withdrawals by employees from qualified plans other than IRAs, this exception applies only if an employee separates from service.

You may withdraw any amount penalty-free if you become disabled before age 59 1/2.

The law allows penalty-free withdrawals to pay for medical expenses or medical insurance, but only to the extent such costs exceed 7.5 percent of your adjusted gross income.

You can withdraw penalty-free up to $5,000 to pay for birth or adoption expenses.

You can also withdraw your money penalty-free from your IRA (traditional, Roth, SEP, and SIMPLE IRAs) for the following reasons:

• To pay for higher education expenses
• To pay for medical insurance if you become unemployed
• To purchase or build a first home for yourself or certain family members—subject to a $10,000 lifetime limit

If you have any questions or need my assistance, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 25, 2023

I’m reaching out to remind you of two important issues related to health insurance deductions for S corporations.

First, if you own more than 2 percent of an S corporation and provide health insurance coverage, there are three steps you need to follow to claim a deduction:

• Step 1. The cost of the insurance must be on the S corporation’s books.
• Step 2. The corporation must include the cost of the health insurance premiums on your W-2 form as taxable income (but not subject to payroll taxes).
• Step 3. If eligible, you must claim the health insurance deduction as an above-the-line deduction on Schedule 1 of Form 1040.

Second, this three-step procedure applies to your spouse, children, grandchildren, great-grandchildren, parents, grandparents, and great-grandparents if they work for your S corporation and the corporation covers them with health insurance.

The three rules apply to the relatives listed, even if they don’t own any stock directly. For health insurance purposes, the tax code attributes your stock ownership to them and deems that they own what you own.

It’s crucial to get this right, as failing to do so could result in a lost health insurance deduction for your family members and zero deductions for the S corporation.

If you or your S corporation did not handle this correctly in the past, we need to amend the returns to ensure that you create and protect the proper tax deductions. If you’re in this situation, please call me at 408-778-9651, and I’ll gladly assist you.

• By Leon Clinton
• March 20, 2023

We are writing to update you on the latest developments in 2023 health insurance for S corporation owners. As a more-than-2-percent S corporation owner, you are entitled to some good news when it comes to your health insurance.

To ensure that your health insurance deductions are in order and to avoid the $100-a-day penalties for violating the rules of the Affordable Care Act (ACA), we have provided the following steps:

1. Get the cost of the health insurance on the S corporation’s books either by making the premium payments directly or through reimbursement.
2. The S corporation must include the health insurance premiums on the owner-employee’s W-2 form, including the additional compensation in box 1 but not in boxes 3 or 5.
3. Owner-employees with more than 2 percent ownership can claim the health insurance deduction as “self-employed health insurance” on line 17 of Schedule 1 of Form 1040, provided that they meet the two rules of not having access to employer-subsidized health insurance and having adequate salary.

For rank-and-file employees, the S corporation does not have to provide health insurance benefits, but if it does, it must use an acceptable ACA plan, such as (among others) the qualified small employer health reimbursement arrangement (QSEHRA) or the individual coverage HRA (ICHRA).

The S corporation can reimburse more-than-2-percent owners for individually purchased insurance without any penalties, but if it reimburses rank-and-file employees without using the QSEHRA or ICHRA, it faces the $100-a-day penalty per employee.

If you are looking to provide health benefits to employees through the S corporation, there are many tax-advantaged options available. If the S corporation provides group health insurance to all employees, including the shareholder-employee, the same rules apply.

We hope this information is helpful. If you have any further questions, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 9, 2023