Author: Leon Clinton

In late 2022, Congress passed the SECURE 2.0 Act, which made several changes to tax-advantaged retirement plans. Many of the changes create new exceptions to the 10 percent penalty on early withdrawals from IRAs and other retirement accounts before age 59 1/2.

Starting in 2024, you will have more options than ever before to withdraw money from a retirement account without penalty. Unfortunately, most exceptions require experiencing something negative, such as a financial emergency, domestic abuse, a terminal illness, or a disaster.

It’s important to note that while these withdrawals will not be subject to the 10 percent early withdrawal penalty, you must pay regular income tax on withdrawals from tax-deferred accounts such as traditional IRAs and 401(k)s. Withdrawals from Roth IRAs held for five years are not subject to income tax.

In 2024, a new emergency personal expense withdrawal exception to the 10 percent penalty will allow you to withdraw up to $1,000 from your retirement accounts in case of almost any type of financial emergency. But you can only do so once every three years unless you pay back the money first.

Starting in 2024, taxpayers who suffer abuse from a spouse or domestic partner may withdraw up to $10,000 penalty-free. Domestic abuse is broadly defined to include physical, psychological, sexual, emotional, or economic abuse.

If you expect to die from a terminal illness within seven years, you can withdraw any amount from your retirement accounts penalty-free—immediately. A doctor must certify your terminal illness.

Starting in 2026, retirement account owners may take penalty-free annual distributions of up to $2,500 to help pay for long-term care insurance for themselves or their spouses.

You can withdraw up to $22,000 from your retirement accounts penalty-free if a federally declared disaster damages your primary residence. This provision is retroactive to January 26, 2021, and applies to all federally declared disasters.

Some of these exceptions can be combined. For example, you could take a penalty-free emergency personal expense distribution and domestic abuse distribution in the same year for a maximum of $11,000. If a federally declared disaster damages your home, you could add up to $22,000. But let’s hope you never experience any of these adverse situations.

If you want to discuss any of the new provisions mentioned above, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• April 4, 2023

As the real estate market has cooled off in many parts of the country, investing in property may seem wise in the long run.

But taxes can be a significant concern.

Owning real estate in a C corporation may not be wise when considering taxes because it puts you at risk of being double-taxed.

This means that if you sell the property and make a profit, the gain may be subject to taxation twice—once at the corporate level and again at the shareholder level when the corporation pays out profits to shareholders as dividends.

The Tax Cuts and Jobs Act reduced the double taxation threat, but with our current federal debt, you face the risk that lawmakers will hike the corporate tax rates and possibly tax dividends at higher ordinary income rates.

To avoid this threat, I usually recommend using a single-member LLC or revocable trust to hold real property. A disregarded single-member LLC delivers super-simple tax treatment combined with corporation-like liability protection, while a revocable trust can avoid probate and save time and money.

If you are a co-owner of real property, it is advisable to set up a multi-member LLC to hold the property. The partnership taxation rules that multi-member LLCs follow have several advantages, including pass-through taxation.

In conclusion, holding real property in a C corporation can expose you to the risk of double taxation, and I don’t recommend it. Instead, consider a single-member LLC, revocable trust, or multi-member LLC, depending on your situation.

If you want to discuss the entities that may be best in your situation, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 30, 2023

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