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I Need My 401K Money Now! Can I Cash Out?

I Need My 401K Money Now! Can I Cash Out?

After retirement, many people often prefer to get their retirement savings as soon as possible. Also, almost everyone would be happier if it was subjected to little or even no tax at all. This is where the 401 K money comes in. It is a plan on retirement savings sponsored by one’s employer. This system allows the workers to save and capitalize some of their cash before tax is deducted.

HOW TO CASH OUT YOUR 401 K

Hundreds of employees do leave their employers in search of greener pastures. Among other things, the 401 k money is one thing that needs attention during this process. If your former employer does not guide you on how to cash it out, you should check with your benefits administrator and choose to cash out your 401k. If you completely do not know how to go about this procedure, then you should consider talking to either human resources at your previous job or consulting with a representative from your 401k administrator. Though you may want to consider a Rollover IRA instead of cashing out your 401k when you switch jobs. Basically, a rollover IRA is just like an account that the 401k money can be transferred to when one is swapping bosses.

 

CASHING OUT 401K EARLY

At times, one may find themselves having saved quite a good sum of money and they may decide to retire quite early. It is then that one may want to consider any of these ways of getting their 401k earlier.

▪     Qualifying disability

All disabled people who have their savings are entitled to getting an early 401k benefit. To verify your status you will have to provide the disability letter to your 401 k custodian.

▪     Disaster relief

Disasters are often unprecedented but they may be a ticket to getting your 401k savings earlier. If you are afflicted with a disaster then you should be qualified to get your 401k savings early.

▪     A visit from a grim reaper

This may be the last option one may have as no one would choose to get an early 401k due to death, which is not often premeditated. But come to think of it, your family will benefit as they will get to use your retirement funds to cover the burial expenses plus other expenses they are to incur in your absence.

 

PENALTIES FOR GETTING YOUR 401K EARLY

A 401k savings plan is literally meant to give income upon retirement hence it is not a priority to get your money when you are still under employment. But times may arrive when you are desperate for cash leaving you with that as your only option as it may seem a better option than borrowing money. The official planned age for getting your 401k is 59 years. You may face taxes and penalties upon your distribution. And you will also have less cash left in your account when you get older. Something that may be costly at that age.

4 IRS Audit Penalties You Should Know About

4 IRS Audit Penalties You Should Know About

The internal revenue service (IRS) is responsible for penalizing taxpayers who fail to file their returns before the stipulated time in the United States. These penalties are mostly in the form of money or a forfeiture of property. There are a couple of penalties, which often depend on the taxes that are defaulted. Remember, the longer a taxpayer takes before paying, the higher the penalty.

A taxpayer is penalized for various reasons which include failing  to file income tax returns for the period or when the taxpayer files incorrect returns for some reasons best known to them. This article clearly outlines the various penalties imposed by the IRS.

1. Penalties due to inaccurate filings

If the IRS audit finds that the taxpayers filed the wrong returns, the person tends to pay 20% of the amount of money that is underpaid. Some of these penalties include:

  • Failure to comply with regulations contained in the Federal tax code rules.
  • Tax returns that are inconsistent with IRS regulations.
  • Misquoting the value of property.
  • Pension liabilities which have been overvalued.
  • Penalties relating to failure to file returns and pay taxes.

The penalty for late filing of returns is subject to 5% of the amount of tax that is not paid, charged monthly up to a maximum of 25%. For individuals who are late in filing returns for more than 60 days, a maximum penalty of 135 dollars is charged.

 

After an IRS audit is conducted and it is found that a person has failed to pay tax, the person will be subject to a penalty of 0.5% for each and every month that the tax is not paid. To make it worse, if the outcome of the audit is failure to file returns, or civil fraud, an interest of 3% is charged annually to the amount of the penalty.

2. Civil fraud penalty

Any fraudulent activity detected by the IRS audit is subject to a huge penalty of 75% on any tax that was underpaid. Some people may find this better than landing in jail and being imprisoned for quite a number of years. The good thing about this is that you cannot be penalized after you are charged a penalty.

3. Intentionally failing to pay the tax required or keeping records.

The internal revenue service considers this as a petty crime. For this type of crime, civil penalties are mostly recommended.

4. Tax Evasion

This behavior is common and quite rampant in a number of countries, such as the famous Chicago crime syndicate boss Al Capone. This involves purposely misrepresenting the books of account to evade paying taxes. The penalty for an individual who has evaded paying tax is 5 years in a federal prison or a maximum fine of $100,000.

TIME PERIOD FOR IRS AUDIT.

Most IRS audits take a maximum of one year, although the time period can extend depending on a number of factors which include:

  • Modification by the IRS auditor which take a long time.
  • Small businesses which requires the IRS auditors to scrutinize website and bank accounts with the sole purpose of determining if the business recorded all its income. This may take a longer time and therefore the need to extend the time period.
  • Arguments with IRS auditor relating to the changes made.

How to File an Amended Tax Return

How to File an Amended Tax Return

Sometimes, additional information may avail itself long after you have filed your tax return. However, there’s a grace period for filing amended tax returns. Amended tax returns should be filed within three years after the original tax return. It could be that you didn’t have a K-1 form or you’ve realized you qualify for some deductions and tax credits. This warrants an amended tax return. So if you’re wondering how to file an amended tax return, here are some tips to guide you.

1.    Gather the necessary documents

You just don’t want to jump straight into filing an amended tax. Gather all the necessary documents such as proof of your amendments to avoid unnecessary delays. You should also have your original return to guide you on what you’re correcting. It will need to be referenced.

2.    Collect the right forms together

The IRS maintains a database for all previous year’s filed returns. So you can easily access all the right forms. Note that you don’t need the whole original tax return, but only the areas that need to be corrected.

3.    Fill form 1040X

Amended tax returns are filed on the Form 1040X, and only on paper. So even if you filed your original tax online, your amended tax return will be done on paper. The form 1040X has simple to follow instructions, and you can just copy some of the information on the original tax return while correcting the areas that need correction. There’s also space to explain the reason for amending your tax return. Keep it brief and honest.

4.    Avoid cherry-picking

You cannot claim to amend your tax only for areas that give you a refund and disregard the areas that increase your tax liability. This will only flag your amendment and prolong the process. So ensure all areas are covered and everything that needs amending is amended.

5.    Some errors don’t need amending

There’s no need to correct mathematical errors on your original tax return. This is because the IRS usually corrects such errors. Even lack of form W-2 does not warrant amending your tax return. The IRS can still process your tax return without it unless requested. Furthermore, certain parts of your original return cannot be amended. For instance, you cannot change “married filing joint” to “married filing separate” after the due date.

6.    Submit the amended return

Once you’re satisfied all errors have been corrected and the information has been updated, you can send your amended tax return to the IRS. Make sure to double check that you’ve attached all the necessary documents. It takes the IRS 8 to 12 weeks to process your return. So give them time before asking about your amended tax return status.

What Triggers an IRS Audit?

What Triggers an IRS Audit?

No one wants to go through a stressful IRS audit. In fact, studies have shown that when people sit down to file their taxes, it can raise their blood pressure. Why? Because of the fear of missing something or triggering an IRS audit. In most cases, it’s hard to come by. On average, the IRS audits about 0.8% of tax returns only. The chances of being audited are thus minimal. However, the risk is still there. Here are several IRS audit triggers that you should avoid.

1.    Your income is too little or too much

Withholding your income can trigger the IRS to audit you. If you claim deductions that reduce your income significantly, you will raise the IRS tax audit flags. Individuals whose incomes don’t match their lifestyle, and trust me, the IRS has ways of knowing about this, are an easy target for the audit. If you earn too much, especially above $200,000, then if the IRS believes there’s a chance to recover taxes from you, you will be put in the spotlight.

2.    Major changes in income

The IRS algorithms are set such that if there’s a drastic change in your income, the IRS tax audit flags will be raised. The algorithms check your income history and expenditure and if there’s a drastic change, then the algorithms can raise an alarm.

3.    You’re self-employed

If you’re self-employed, then you can be an easy target for IRS audits. This is because self-employed people are more likely to report wrong figures. That notwithstanding, self-employed people are at a high risk of overlooking some incomes as they may receive some payments in cash. Every income earned is subject to tax.

4.    Claiming a lot of deductions

When you start claiming too many deductions, for example, claiming that you gave huge amounts of donations when you didn’t, your chances of being audited become manifold. This is known as itemizing. The IRS expects that you live within your means. You can’t claim to give donations of $30,000 when your income is $40,000.

5.    Dealing with cash only transactions

Dealing with a cash business puts you on the spot too. You’re not receiving 1099s for your services, and you’re also most likely to overlook incomes. In other instances, when your lifestyle surpasses your means, IRS tax audit flags can get raised.

6.    You have foreign accounts

The IRS has become strict recently with regards to offshore accounts. They can solicit your bank information from the foreign bank to ensure that your account balances match with what you file. So having a foreign bank account does not hide you from the long arm of the government.

Why Is My Tax Return Under Review By The IRS?

Why Is My Tax Return Under Review By The IRS?

Mistakes are sometimes inevitable when filing tax returns, especially for businesses. For this reason, it’s not uncommon to have your tax return put under review. When you receive the IRS review letter, it does not always mean you will be audited. It could be that you miscalculated, didn’t include a form, or the computer is simply taking more time processing your return. In any case, inquire from the IRS why your return is under review to have a better perspective on what to do. Here are some of the reasons why the IRS may review your tax return.

1.    Processing of electronic filing

If you use an online portal to file your returns, the portal usually puts your tax return under review. This simply means IRS hasn’t yet received the tax return, and once it’s reviewed, it will either be accepted, flagged for errors, or moved for in-depth auditing. So unless the IRS has received your return, the portal will display it as under review. So no need to worry.

2.    Audit

While not all tax return reviews lead to in-depth auditing, some reviews may prompt for an audit. This is usually the case when the forms don’t add up or your filings have raised red flags that cause the IRS to require a full audit. That’s why it’s important that when you receive an IRS review letter, to read the details and understand the reason for the review.

3.    Miscalculations

To err is human. During filing, taxpayers are required to calculate their credit and deductions before filing their tax returns. If you’re not familiar with the calculations, you may do them incorrectly.  The IRS system will raise red flags when miscalculations are detected, putting your return under review. This delays the process, but in most cases, the IRS will correct the calculations and adjust accordingly.

4.    Missing forms

When you file your tax returns and fail to include crucial forms such as W-2s, or receipts for expenses, or bank statements, the IRS may raise red flags and put your tax return under review. In such instances, all you need to do is gather the missing forms and mail them to the IRS or have your tax return adjusted and the missing forms included. It is therefore not a cause to worry.

5.    Additional forms

Sometimes you may have included all the necessary forms required when filing tax returns, but the IRS may require additional documents. This causes your tax return to be put under review. This happens when the IRS has reasons to believe that you are misrepresenting facts, prompting them to ask for proof. When this happens, you simply have to look for the requested forms and add them.

What Do I Do If I’m Audited by the IRS

What Do I Do If I’m Audited by the IRS

On average, chances of someone earning less than $40,000 a year receiving an IRS audit letter are minimal. But if you’re unlucky enough, it’s not something to sweat over. The IRS probably wants to establish your honesty regarding your tax filings, as they sometimes do issue random audits. Whatever the case, the audit procedures can seem overwhelming. If found guilty, you’ll have to pay the amounts accrued together with penalty fees. So you need to understand the procedure of being audited by the IRS and know what to do during the process. Here are a few things to keep in mind.

1.    Gather the relevant documents and receipts

There are three main types of audits: the correspondence audit, the office audit, and the field audit. The correspondence audit is usually prompted by a typo during filling. The IRS simply wants the original documents to countercheck why the forms filled in don’t match. So when you receive the IRS audit letter, start collecting and arranging your tax documents in order so that you can comply with their requests. Some of the documents include:

  • W-2 Forms
  • Form 1099s
  • Bank statements
  • Proof of income
  • Investment statements
  • Bills, receipts, or other expenses proof.

2.    Hire a tax lawyer

If you’re like most people, you’re not conversant with the tax code. Furthermore, it might be your first time being audited by the IRS. Hiring professionals like tax lawyers who are conversant with the law and can raise flags when the auditor isn’t complying with the law can help a great deal. Furthermore, the IRS allows individuals to be represented by a professional as long as they write a letter of request. After approval, the IRS will not contact you directly. This way, you can have peace of mind as the IRS audit procedures continue in the background. However, for the correspondence audits, you can do that yourself.

3.    Avoid being rude to the auditor

The IRS auditing is usually at the discretion of the auditing officer. Being rude or unfriendly to them simply because they’re conducting an audit will not help you in any way. In fact, it will only make matters worse, and small mistakes that the auditor would over look will become a big deal. Furthermore, the auditor is just doing his job. He’s not there because he hates you. So accommodate the auditor and be honest. Sometimes the IRS asks questions they know the answers to so that they can test your honesty.

4.    Understand your rights during an audit

Auditing is a government activity that’s not supposed to be used to coerce anyone into doing anything. You therefore are not at the mercy of the auditor. You have the right to be informed. The auditor should tell you what is needed for you to comply. You also have the right to appeal the decision of the auditor as well as the right to be represented.

5.    Review the audit findings

Once the audit procedures are over, review the findings and if there were mistakes, you will likely have to pay penalties together with the accrued tax amounts. If you’re lucky, nothing changes. And in some cases, you get a refund. If you disagree with the findings, you have 30 days to appeal.

Perfect Alternatives to a 401k Plan

Perfect Alternatives to a 401k Plan

401K is a contribution plan that was enacted in 1978 in a bid to allow employees to make a pre-tax contribution to the 401k account or plan. The plan works in such a way that funds are automatically deducted before payday. In simple terms, the contributions are made before the said employee receives his/her paycheck.

The good thing about the 401K plan is that any venture, regardless of its nature, can be able to adopt the plan. Also, it gives employers the power to restrict individuals that they feel are not qualified for the plan. Employees who are aged over 50 also have a package that allows them to make catch-up contributions. Remember that the plan is not compulsory for employers.

The list of the benefits is endless. However, there are some employers that may not be able to offer the 401K plan. Nevertheless, all is not lost, the following are the best alternatives to 401k.

1.    SEP IRAs

SEP IRA stands for Simplified Employee Pension Individual Retirement Account and is one of the best alternatives to 401K. This is especially if you are a freelancer. SEP IRA works with the same guidelines that a Traditional IRA works with: you will get tax benefits such as tax credits now as opposed to later.

SEP IRAs could be the best pick as they have no restrictions on what type of business wants to establish the plan.

2.    Index funds

What are index funds? These are investment funds that are founded on an index of stock such as the Dow Jones. Note that if you invest in an index fund, your investment will solely be based on the performance of the particular index. This is for the reason that by investing in an index fund, you are buying and holding the securities of that specific platform.

The goodness with this is that you will be investing in a portion of every asset as opposed to the entire stock.

3.    Traditional and Roth IRAs

Traditional IRAs work quite different from Roth IRAs. With the traditional ones, the contribution to the account is tax-deductible. Whereas, for Roth IRA the contribution is not tax deductible. You should, however, note that there exist eligibility requirements for Roth IRAs, you should, therefore, get a deep insight into the plan before establishing it. The advantage is that your income after retirement is tax-free.

Working with both IRA plans is advisable as you will be able to reap the tax benefits both now and later.

4.    Taxable brokerage account

The benefit that this alternative has over 401K is that it gives you flexibility. It is winning because taxable brokerage accounts give you the freedom to choose what you want to buy and allows you to sell it any time you want to. Although you will have to pay taxes on any gains you get from the investment, there are no penalties imposed on early withdrawals.

Do I need to file my taxes?

Do I need to file my taxes?

Globally, most governments have put in place a system which aids the government in meeting public expenditures: tax. In simple terms, a tax is a compulsory charge imposed on a taxpayer, (which may be an individual or an entity) by a governmental organization to get funds for the mentioned expenditures.

A majority of the states worldwide have tax with the exception of a few countries like Oman, Bahrain, Kuwait, Bermuda and so on.

Well, in the United States it is mandatory to pay tax. For a long time, the IRS has had a tough time battling tax protestors who come up with all kinds of a school of thought and mislead people into thinking that they are not supposed to be paying tax.

However, in 2010, the IRS was able to release a rebuttal for the variegated anti-tax arguments. In that document, the government agency confirmed that the law asserts that federal income tax must be paid.

Is it mandatory to file returns?

This may sound new, but not everyone needs to file a federal tax return. It does not, however, mean that there are no people that still file their returns: there still are. But the particular persons are unfamiliar with IRS requirements.

Before you file your returns, there are a number of things that you need to put into consideration. Also, some confusion may arise as to whether you should be filing your return if you do not owe any tax. Note that having a filing requirement and not owing tax are two separate things. The rules still stand: IRS has confining guidelines when it comes to who is supposed to file.

What are the IRS filing requirements?

1.    Rules for self-employed business owners

What does being self-employed mean? It basically means that your source of income does not originate from an employer. Rather, you get it by providing services to other businesses or individuals or you operate a business as a sole proprietor or in a partnership.

When it comes to self-employed individuals, you are required to file returns if you have a minimum of $400 net earnings.

2.    Dependents and children

The guidelines that hold for this group are different. In as much as children are claimed on someone else’s returns. They are still required to file theirs. The rules being different for dependents and children being can be attributed to the fact that they are governed by reduced deduction amounts.

3.    Refunds

Filing for refunds is not a requirement per say, but you may be required to file for this if you are seeking a tax refund. Refunds may result from taxes being detained from other payments and pay checks.

Also, if you are eligible for refundable tax credits, the only way you can get a refund is by filing a tax return.

4.    Conventional filing requirement

Last but not least, the IRS has filing guidelines that cover most taxpayers too. For general filing, the law provides that you are supposed to do it if your gross income exceeds automatic deductions for that particular year.

Benefits of a Roth IRA Plan

Benefits of a Roth IRA Plan

What is a Roth IRA? Roth IRA is a retirement plan. How it works is pretty simple. Roth IRA is a special retirement account, you finance with your post-tax income. This means that you are not supposed to finance it by deducting input from your income tax. However, the action will manifest later as your future withdrawals will be tax-free.

The idea of a Roth IRA savings account is that your money grows without being taxed. Note that there are two types of IRAs. The counterpart to Roth being Traditional IRAs which have different guidelines. In Traditional IRA, the tax is deferred to a much later date: that is, your retirement.

The plan has an endless list of benefits, especially if you are wise enough to get started early.

4 Benefits of Roth IRA

1.    Tax-free income

Imagine saving for about 30 years then your savings get taxed? You will definitely feel the pinch. One of the major benefits of the plan is that when you retire, your investment shall not be taxed. The idea of the plan is that you get to pay for your contribution’s income tax in advance.

Note that not only will your contributions, which will be the principle come out tax-free, but also your earnings will have that benefit. The fruits of your investment could not get sweeter than Roth IRA.

2.    Roth IRAs are flexible

Managing an emergency savings account is not an easy task. Unlike other retirement savings accounts which give penalties if you make withdrawals before retirement, Roth IRAs offer you much flexibility.

You are allowed to make withdrawals at any given time, and the beauty of it is that it is penalty-free. Additionally, you do not need to worry if you cannot boast of having financial discipline yourself. Your withdrawals are regulated, especially if they exceed the contribution you have made so far.

Roth IRA also gives special consideration when it comes to cases such as disability, back taxes, health insurance payment if you are unemployed and uncompensated medical expenditure.

3.    Heirs benefit too

Put in layman’s language, you could say that with a Roth account, you can pay for your heir’s taxes in advance. Nothing beats leaving your beneficiaries a tax free income that can extend through their lifetime.

If you have been focused on saving through this account, you can rest assured that you have your generation covered their entire lifetime. With such knowledge, nothing can stop you from leaving your offspring a fortune that will take care of them for an extended period of time.

4.    There is no restriction to the age that should be contributing

Unlike the Traditional IRAs that restrict people aged over seventy and a half years, Roth IRA has no limitations. It is important to understand that being barred from contributing comes with its challenges. Among them is the fact that, upon hitting seventy and a half years old, you will be forced to make withdrawals, lest you will be taxed.

5 Tips to Pay Off Debt Fast (Even With Low Income)

5 Tips to Pay Off Debt Fast (Even With Low Income)

Debt has been associated with causing depression, stress, and anxiety. It sometimes even leads to suicidal feelings when it becomes too overwhelming. Avoiding this vice should be a number one priority if you find yourself entangled with debts. Credit cards contribute to most people’s debt woes. So learning how to pay off credit card debt fast is a highway to financial freedom. Here are 5 tips to pay off debt fast.

1.    Live within your means

There’s a saying that goes, “If you can’t pay in cash, don’t buy it.” So always use cash to buy what you need and if it’s beyond your means, then by all means, avoid it. Taking loans to buy stuff that you can’t afford only adds to your burden. If you want to pay off debt fast, then you’ll need to cut down on your credit card expenditure.

2.    Set a budget

Another effective way is to set a budget. Setting a budget ensures that you’re in control of your money. It will help ensure you don’t overspend on unnecessary things. Also, you can include your debts in your budget and set aside money to pay them off. This way, your debt becomes part of your expenditure making it easy to pay it off.

3.    List down your debts

Having a list of all your debts is a good way to know what you owe vis-à-vis your income. List them down according to priority or due dates so you can pay the right debt in time. It’s also a good way to make yourself self-aware of your debts so you can work towards paying them off.

4.    Cut down on expenses

Cutting down on expenses is one of the most effective ways to ensure you have more disposable income. When you cut down your expenses, not only does it mean you’ll have more money to pay off your debts, but also you will be able to save the extra income. If you’re living in an expensive house, move to a cheaper house, and use the extra money to pay off your debt. Once your debt is paid off, you can begin saving for the future.

5.    Save

To pay off your debt fast, you will need to save money. During budgeting, set aside a percentage of your income and ensure you adhere to the budget. You can also use pre-approved payments to send money directly to a savings account. Set paying off debt fast as a goal and once your savings reach your target, pay off all your debt.

While paying off your debt may seem like an unpleasant issue at first, you will be amazed by the emotional and psychological freedom that it brings. Starting small even if you have a lot of debt will go a long way in ensuring that you will be debt free in a few years or even months. Following these tips will help you to achieve a debt free life in the shortest time possible.

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