Money Management

The quick answer? It depends on why you’re removing that money. 

It’s important to save for retirement, because without a nest egg of your own, you might struggle financially later in life. Case in point: The average older American on Social Security today receives a benefit of $1,827 a month. That’s an annual income of around $22,000, which generally won’t make for a very comfortable retirement.

If you want to set yourself up for a stable retirement, then it’s a good idea to contribute money steadily to an IRA account. But you may reach a point where you want to tap your IRA ahead of retirement.

Generally speaking, you’ll be penalized to the tune of 10% of the sum you withdraw for removing funds from an IRA before reaching age 59 1/2. But there are also some exceptions to this rule you should know about.

The circumstances of your early withdrawal matter

It might seem unfair that you’d be penalized for removing money from your IRA prior to age 59 1/2. After all, that money is yours — and you no doubt worked hard to save it.

But remember, when you fund a traditional IRA, you get a tax break on the money you contribute. A $3,000 traditional IRA contribution this year, for example, will exempt $3,000 of your income from taxes. Because the IRS gives you that break, it wants you to use your IRA funds for their intended purposes — retirement. And it doesn’t tend to take kindly to early withdrawals.

There are, however, a few exceptions. For one thing, if you’re a first-time home buyer, you’re allowed to remove up to $10,000 from your IRA to purchase a home. And if you and your spouse are both first-time home buyers, that $10,000 limit applies to each of you individually, giving you the option to remove up to $20,000 in total and use those funds for a down payment.

The second exception is that you’re allowed to remove funds from an IRA early without penalty to pay for college. And to be clear, that holds true whether you’re paying your own college tuition, or whether you’re paying it for a spouse or child.

There are also certain other limited exceptions. You can usually, for example, take an early IRA withdrawal without penalty to cover medical expenses that exceed 10% of your adjusted gross income.

But otherwise, if you tap your IRA prior to age 59 ½, you should expect to be penalized. This holds true even if you’re raiding your IRA to cover something important, like a home repair.

Should you tap your IRA ahead of retirement?

If you’re looking to do something like pay for college or buy a home, it’s easy to see why taking an IRA withdrawal might be tempting. But remember, every dollar you remove from your IRA is money you won’t have available in retirement, when you might need it the most. So generally speaking, it’s best to leave the money in your IRA alone and save for things like a home purchase or college separately.

Keep in mind, too, that when you remove money from your IRA ahead of retirement, you lose out on more than just that principal withdrawal. That’s because IRAs can be invested, and over time, your money can grow.

So let’s say your IRA normally delivers an average yearly 7% return. If you take a $10,000 withdrawal to buy a home at age 35, and you don’t retire until age 65, you’ll end up with $76,000 less for retirement when you factor in lost investment gains. And so while raiding your IRA might seem like a good solution when you need to pay for a home or education, doing so could be really detrimental to your retirement.

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Putting my inner DIYer on a leash is never easy, but often necessary. 

Taking care of basic repairs and maintenance tasks yourself is a great personal finance hack. With a little time and elbow grease, you can save quite a bit of cash.

But certain tasks are well beyond what the average person should be tackling themselves. Taking on tasks well outside your skill level is actually the opposite of smart personal finance, as it can end up costing you significantly more in the long run.

One of the areas rife with these sorts of experts-only problems is auto repairs. Modern cars require so much specialized know-how and equipment that trying to DIY your way through anything but basic repairs is asking for trouble. Here are a few examples of car repairs to leave to the pros.

1. Computer / sensor issues

A couple decades ago, cars were much simpler machines. These days, however, most automobiles are complicated computerized electronics on wheels. In other words, just about everything in your vehicle is controlled by a computer.

As anyone who has accidentally set their phone to the wrong language can attest, it doesn’t take much to mess up a computerized system. This can have serious safety consequences, not to mention cause cascading failures throughout the vehicle. If your car needs any kind of work on its computers, sensors, or major electrical systems, let a professional handle it.

2. Anything that requires removing multiple parts

There are some basic car repairs that most of us can manage. Some of these repairs even require removing the occasional part for access to something else. But if your car needs a repair that will require you to remove multiple parts — that might be the time to turn to an expert.

For one thing, many parts in your vehicle require specialized tools to remove. These tools can get expensive quickly. Even affordable tools don’t make sense to buy if you’re only going to use them once.

And, of course, the more items you remove, the more you have to put back. If you’ve ever disassembled something for cleaning, only to wind up with extra parts once you put it back together…well, let’s just say you wouldn’t want to find out after the fact that you suddenly have a “spare” bolt.

3. Electric vehicle repairs

The modern gas-powered car is about as close to older combustion engines as a high-speed rail is to the model train under your Christmas tree. Similarly, electric vehicles are about as close to modern gas-powered cars as they are to those little electric remote-controlled cars they sell to children.

That is to say, even experienced mechanics avoid electric cars if they haven’t specifically trained on them.

The best YouTube video out there isn’t going to give you the specialized education necessary to do anything but the most basic maintenance on an electric vehicle. If you have an EV, make sure you also have a qualified mechanic. This isn’t DIY territory.

4. Windshield repairs

Your windshield is the only thing standing between you and thousands of insects. Not to mention rocks, dirt, and other debris on the road. But all windshields eventually wind up with chips and cracks.

That’s when you call a pro. No matter how easy the commercials make it look, repairing or replacing a windshield isn’t easy. Not only does it require specialized tools, but it also takes actual training, too.

If your windshield isn’t properly fitted and secured, it could quite literally be ripped off at high speeds. And a poorly repaired chip could easily turn into a crack — or worse. I can imagine having your windshield shatter at 70 mph on the highway isn’t particularly pleasant.

5. Recall-related repairs

You’d be hard-pressed to find a vehicle on the market that hasn’t had something recalled at some point. Manufacturers (or the NHTSA) put out recalls for everything from airbags to door latches.

While it’s absolutely a great idea to address a recall-related issue as soon as possible, you shouldn’t do it yourself. There are a few reasons for this, starting with the fact that recalls generally only happen when there is a safety issue. And when it comes to your vehicle’s safety, it’s probably best to let a professional handle the issue.

But, perhaps more importantly, it’s not even going to save you any money. That’s because repairs due to recalls are always paid for by the manufacturer. All you need to do is contact them to schedule the repair and show up. They should handle the rest free of charge.

6. Anything that could void your warranty

Most new cars nowadays come with fairly long warranties. At the long end, you could qualify for up to 10 years of full coverage. Even manufacturers with short, three-year bumper-to-bumper warranties still include much longer warranties to cover the drivetrain.

These warranties can be worth their weight in saffron (the world’s most expensive spice; it’s worth more, per pound, than gold). That is, unless you mess up a DIY repair and manage to void that warranty.

What is — and isn’t — allowed will vary by manufacturer and, perhaps, by the model. While most should allow basic repairs and maintenance, many will likely require major repairs to be handled by a competent mechanic.

For the DIYer, it’s always tempting to try to shave some cost off whatever car issues crop up. But sometimes the smartest thing you can do is know when to call in the experts.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Brittney Myers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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It may cost more than we want, but insurance coverage is a must when things go wrong. 

Last summer, shortly after moving to another state, we purchased a new auto insurance policy. I recently had a question about our coverage and called our agent. Before ending the call, the agent gave me a heads-up that I should expect our premiums to go up this summer when our policy is due for renewal. This is in spite of the fact that my husband and I have clean driving records, high credit scores, and have rarely made a claim.

For most Americans, rates are up across the board. We have inflation to thank for a portion of those rate increases. However, there are other reasons rates can jump. Here are the six of the most common ones.

1. Driving record

Speeding violations, reckless driving, driving while intoxicated, and accidents (even if you were not at fault) can all lead to higher rates. Rate increases tend to stick around for three to five years and can end up costing far more than anticipated.

2. A new ride

It usually costs more to make repairs to a new car than an old one following an accident. A new car is also a more tempting target for anyone who’s looking to break into or steal a vehicle. If you’re considering buying a luxury car or a vehicle with a powerful engine, you might give your insurance company a call first to learn how much it will boost your insurance rate.

3. Credit score

You may not realize that insurance companies factor in your credit score as they determine your policy premium. That’s because research has shown that people with lower credit scores tend to make more insurance claims than those with higher scores. If your score is lower than you would like, you can always take steps to raise it before applying for your next insurance policy.

4. Where you reside

Simply put, some areas of town are safer than others. Police records show where the most thefts and break-ins occur. They also reveal where the most accidents take place. If there’s a sudden spate of car thefts in your neighborhood, it could impact your rates.

Where you live can also impact which perils are most likely to occur. Let’s say you live on a flood plain or your house backs up against a large river that’s known to overflow during storms. The fact that your car is at greater risk of suffering flood damage will impact your rates.

5. An additional driver

Adding a driver to your policy is likely to increase your premiums, particularly if that driver is a teenager or an adult with a less-than-perfect driving record.

Any time you add a new driver to your policy, make sure to take advantage of every discount available to you. For example, if a teen driver is a good student, ask the insurer about good student discounts.

6. Number of previous claims

Insurance coverage can be priceless, especially when it protects you from financial peril following a claim. However, any time you make a claim you may find yourself facing a rate increase. Whether your rates go up depends on several factors, including whether you were at fault, how many claims you’ve made in the past, and the size of the claim.

If you have a small fender bender or one of your car windows is broken by a tree branch during a storm, you might weigh the cost of making repairs on your own against the potential cost of a higher insurance premium.

While no one wants to pay higher rates, there are few things more dangerous to your financial health than driving without insurance coverage.

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The Free File program has been around for over 20 years. 

Every spring, hundreds of millions of Americans calculate what they owe in federal and state income taxes. For many Americans, free tax preparation software can help to save time and money when calculating tax liability. Are you eligible for free tax preparation help, and how can you access it? Read on to find out.

IRS Free File

Since 2002, the Internal Revenue Service, or IRS, has teamed up with private tax-preparation companies to help Americans calculate their tax liability.

This partnership, known as the IRS Free File Alliance, allows taxpayers under a certain income level to file their taxes with guided software for free. If your adjusted gross income fell below $73,000 in 2022, you’re in luck. With a handful of questions and automatic calculations, you can file your taxes for free with one of the Alliance partners.

But what if you’re above the maximum income threshold? The IRS will make you do all of the work, but at least you’ll get fillable forms and a 25 page user’s manual to work with.

Where to go

The IRS may not advertise the Free File program well, but it is easy enough to get started if you know where to look.

First, go to: https://apps.irs.gov/app/freeFile

Once there, you can browse tax preparation providers. The website allows you to filter out providers based on your income, age, Earned Income Tax Credit eligibility, military service, and state. There are seven different providers who are part of the IRS Free File Alliance, each of which best serves different types of taxpayers.

Once you have chosen a tax preparation program, continue on to the given website. The software will guide you through your tax return from start to finish and will even allow you to pay taxes online. Happy filing!

State returns

However, many Americans will also owe taxes in their state of residence. Can the Free File program help with that too? It depends.

The ability of a taxpayer to file a state return for free using Free File Alliance software will vary. Generally, whether you qualify to file a free state tax return depends on your state of residence and the provider you choose. While some providers offer free returns in some states, others don’t offer the service at all.

Tax preparation is a headache that millions of Americans could do without. Yet, for those who earned less than $73,000 last year, the preparation process might be a little easier. By using the IRS Free File program, you could save hours filing your taxes without breaking the bank.

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You might get a lot more control over your money. 

Many people use employer-sponsored 401(k) plans to save for retirement. Doing so often means getting an employer match that makes it easier to build savings.

But you might reach the point where you’re leaving your job, or where you’re being forced to leave due to circumstances outside your control. At that point, you may have the option to leave your money in your old 401(k). But that may not be an optimal move.

In that situation, you could instead roll your old 401(k) into a new one if you’ve gotten a different job and your new employer has its own retirement plan. But if you don’t have access to a new 401(k) plan, you could always open an IRA account and do a rollover into it.

That said, there are rules you’ll need to follow if you want to go this route. And failing to stick to them could result in penalties.

The upside of rolling your 401(k) into an IRA

While many 401(k) plans will allow you to stay invested in a former employer’s plan, a better bet may be to move your money into an IRA. That way, you’ll have all of your savings in one place, and you may have an easier time keeping track of your money.

Plus, IRAs tend to offer a wider range of investment choices than 401(k)s. With a 401(k) plan, you’re generally limited to a few dozen funds, some of which might come with expensive fees that eat away at your returns over time. IRAs, on the other hand, allow you to invest your retirement savings in individual stocks. That could make it easier to build a portfolio that lends to achieving your financial goals.

How to roll your 401(k) into an IRA

When it comes to moving 401(k) funds into an IRA, there are two choices: direct rollovers and indirect rollovers. With the former, your money simply moves from your old 401(k) into your IRA without you having to act as the middle person.

If you don’t do a direct rollover, either because that option isn’t available or because you choose not to, then what’ll happen is that you’ll get a check for your 401(k) plan balance. But it will then be on you to get that money into your IRA within 60 days.

If you don’t make that transfer within 60 days, you risk having the check you receive for your 401(k) funds treated as a distribution from your savings. And if you’re under the age of 59 1/2, that will result in a 10% penalty on the sum you’ve moved over. So if your old 401(k) balance is $20,000 and you don’t roll it over in time, you’ll lose $2,000 as a penalty.

Another issue is that if your 401(k) check is considered a distribution, you’ll face taxes on it. And that could result in you losing an even larger chunk of money. So if you’re going to move your 401(k) into an IRA, aim for a direct rollover. And if not, mark that 60-day deadline on your calendar so you don’t miss it.

It’s important to keep tabs on your retirement savings, manage your investments, and track your progress. Rolling an old 401(k) into an IRA should allow you to do all of these things — and potentially set the stage for the financially secure retirement you’re after.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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