Is the 10% Penalty on Early Withdrawal Waiver For 2022 Waiver?
Individuals who withdraw money from tax-deferred savings accounts (such as IRAs and 401(k) plans ) before reaching age 59 1/2 usually face a 10% penalty in addition to regular income taxes, although there are exceptions.
Under COVID-19, many have faced significant difficulties, such as job loss or reduced work hours; increased education expenses; or buying their first home.
Hardships
If medical bills, a divorce, or other expenses prevent you from living comfortably, tapping your retirement accounts may seem like a good solution – though beware, as income taxes and penalties apply if you withdraw prior to age 59 1/2.
Experts advise you to save for emergencies using a regular savings account or take out a personal loan with low-interest rates that you can pay back over several years. Also consider federal and state assistance programs, such as grants or scholarships, when saving.
Capitalize is also a useful free tool that can assist with consolidating multiple 401(k) accounts that have high fees into one manageable IRA, eliminating fees that might otherwise eat away at your gains. The IRS provides this table detailing which expenses qualify as hardship withdrawals without incurring the 10% penalty fee.
Higher Education Expenses
College costs appear to increase annually, yet tax breaks exist to help ease their expense. One such break is student loan interest deductions. Other educational expenses qualify as well, including tuition and fees as well as books, supplies and equipment necessary for enrollment (even if not directly paid to school), room and board and expenses related to disability expenses; travel, entertainment or non-educational costs as well as courses that include sports or hobbies (unless part of degree program) do not.
An advisor can assist in devising the optimal tax strategy to cover higher education expenses while taking advantage of exclusions and exemptions. Keep in mind that all expenses must be incurred during the tax year of which withdrawal was made to qualify for any benefits.
Buying a First Home
Costs associated with purchasing a home are considerable. There are mortgage, closing costs and down payment requirements in addition to repairs or upgrades that could occur, making budgeting for such expenditures essential. Determining how much a buyer can afford requires an analysis of debt & savings accounts as well as an emergency savings account with three to six months worth of expenses in savings for emergencies.
In certain circumstances, such as hardship distributions to meet an immediate financial need or distributions for qualified higher education expenses or funeral costs. Under 2022 Secure Act 2.0, additional exemptions were added.
Buying a Car
Consumers typically have more freedom and flexibility when it comes to shopping around and haggling over prices for new cars; however, with shortages exacerbated by global events like pandemic, supply chain issues and chip shortages — purchasing one has become more challenging than usual this year.
If a buyer finds their desired model on a dealer lot, they may be able to test drive and negotiate its price before making their decision. Otherwise, they may need to settle for used cars.
Like real estate buyers, car buyers must be aware of “out-the-door” prices, which include all costs associated with owning a vehicle such as taxes and DMV registration fees. While some of these expenses may be legitimately applicable costs associated with owning one, others can be pure profit generators for dealers and often go undetected by consumers; as a result, the Federal Trade Commission has proposed new rules to help reduce these shenanigans.
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