investment

Reviewed by Amy Drury
Fact checked by Michael Rosenston

While it may sound boring or esoteric, financial accounting plays a key role that allows businesses to keep track of all their financial transactions. It is the process in which companies record and report the pieces of financial data that go in and out of its business operations that allow both company managers and outside investors and analysts to understand the company’s health and make informed decisions.

Key Takeaways

• Financial accounting involves recording, summarizing, and reporting the stream of transactions and economic activity resulting from business operations over a period of time. 
• Governed by a standard set of practices, financial accounting’s end product is a set of official company financial statements including the balance sheet and income statement.
• These financial statements are then used by company managers, investors, analysts, lenders, and other stakeholders to make informed decisions.

Standards and Best Practices

There are a series of accounting principles that companies must adhere to in their financial accounting. Publicly traded companies in the United States must follow the generally accepted accounting principles (GAAP), a common set of standards and best practice that accountants follow when they crunch their numbers and complete financial statements.

Companies outside the U.S. generally follow other international standards that vary by region and country. But, regardless of which set of standards is followed, there are three main areas where financial accounting helps with decision-making:

1. It provides investors with a baseline of analysis for—and comparison between—the financial health of securities-issuing corporations.
2. It helps creditors assess the solvency, liquidity, and creditworthiness of businesses.
3. Along with its cousin, managerial accounting, it helps businesses make decisions about how to allocate scarce resources.

Investing Decisions

Fundamental analysis depends heavily on the accounting data that is recorded on a company’s financial statements, including the balance sheet, income statement, and cash flow statement.. Each of the financial statements for publicly traded companies is created and reported according to the financial accounting standards set forth by the Financial Accounting Standard Board (FASB) and submitted to the Securities and Exchange Commission (SEC).

Investors and analysts use the information from financial statements to make decisions about the valuation and creditworthiness of a company, allowing them to set price targets and determine if a stock’s price is fairly valued or not. Without the information provided by financial accounting, investors would have less understanding of the historical, current, and prospective financial health of stock and bond issuers. The requirements set forth by the FASB create consistency in the timing and style of financial accounts, which means investors are less likely to be subject to accounting information that has been filtered based on a firm’s current condition.

Lending Decisions

Financial accounting is also a key for creditors, from banks to bondholders. Because financial statements outline all its assets as well as the short- and long-term debt, lenders get a better sense of a company’s creditworthiness.

A number of common accounting ratios creditors rely on, such as the debt-to-equity (D/E) ratio and times interest earned ratio, are derived entirely from a company’s financial statements. Even for privately-owned businesses that do not necessarily follow the requirements of the FASB, no lending institution assumes the liability of a large business loan without critical information provided by financial accounting techniques.

Ultimately, a lender really wants to know just how much risk is involved when lending a company money, which can be determined by reviewing the company’s financial accounting. Once this level of risk is determined, the lender will also be able to outline exactly how much to lend and at what interest rates through the process of underwriting the loan.

Corporate Governance

Reliable accounting serves a practical function not only for outside investors and lenders but also for the internal workings of the firms themselves.

The most obvious benefit for businesses to refer to their financial accounting is to meet the legal and regulatory obligations outlined for (public) firms. Companies must be honest and transparent about their financial activities and the data reported must be accurate and regularly updated.

Beyond the regulatory and compliance hurdles financial accounting moreover helps companies optimize their day-to-day operations and identify the types of projects that could provide growth opportunities in the future. Financial accounting helps managers create budgets, understand public perception, track efficiency, analyze product performance, and develop short- and long-term strategies, among several other decisions aided by accounting figures.

The Bottom Line

Financial accounting is a way for businesses to keep track of their operations, but also to provide a snapshot of their financial health. By providing data through a variety of statements including the balance sheet and income statement, a company can give investors and lenders more power in their decision-making.

Using a Roth IRA to retire early

Fact checked by Skylar Clarine
Reviewed by Ebony Howard

If you are following a Financial Independence, Retire Early (FIRE) plan, you are likely already aware of the importance of minimizing your spending and maximizing your savings. However, it’s also important to consider the tax that you will pay when you withdraw these savings in retirement—and that’s where a Roth individual retirement account (Roth IRA) comes in.

Roth IRAs are similar to traditional IRAs, with the biggest difference between the two being how they are taxed. Roth IRAs are funded with after-tax dollars; this means that the contributions are not tax-deductible. Once you start withdrawing funds, the money is tax-free. Traditional IRA deposits are made with pretax dollars; you generally get a tax deduction on your contribution and pay income tax when you withdraw the money from the account during your retirement years.

In this article, we’ll look at how Roth IRAs can fit into your FIRE plan.

Key Takeaways

• Money invested in traditional pretax retirement accounts like a 401(k) can be converted into an investment in a Roth IRA.
• This allows FIRE investors to access their retirement savings in early retirement tax free as long they stay within the rules.
• Roth IRAs also can be used as a source of emergency income in early retirement or as a way of passing on wealth to your heirs.

Roth Conversions

There’s nothing wrong with using a Roth IRA in the standard way, even if you have a FIRE plan. Roth IRAs can be a good vehicle for long-term investments that you can then withdraw, tax-free, in retirement. If you plan to retire early, you can withdraw your contributions to a Roth IRA before you are 59½ years old, but you must wait until after that age to withdraw your investment earnings. Otherwise, you will pay an early withdrawal penalty.

There are some general advantages to Roth IRAs for FIRE investors. These are a consequence of the main differences between Roth IRAs and standard IRAs. With a Roth IRA:

• Contributions are not tax deductible.
• Contributions can be withdrawn anytime tax- and penalty-free.
• Both investment earnings and contributions can be withdrawn tax- and penalty-free as long as you are at least age 59½ and your Roth IRA is at least five years old.  

There are other exceptions for taking money out of a Roth IRA, such as using them to pay for a first-time home purchase or qualifying educational expenses. However, for the purpose of early retirement, the three points above are the most important.

The other factor to consider for FIRE investors is that money originally invested in regular retirement accounts—traditional IRAs, and 401(k) or 403(b) plans—can be moved into a Roth IRA. This is called a Roth IRA conversion. Contributions to these accounts are generally tax-free, and since Roth IRAs allow you to withdraw tax free, you get the best of both worlds. You can contribute to your regular IRA tax-free while you are working, and withdraw this money from your Roth IRA tax-free, even in early retirement.

That’s not to say that Roth conversions are free. You will have to pay ordinary income tax on any retirement savings transferred into a Roth IRA in the year of conversion.

For example, if you move $40,000 from an old 401(k) plan into a Roth IRA, and you’re in the 12% tax bracket in 2024, the first $11,600 gets taxed at 10% and the remaining $28,600 at 12%. As a result, you’ll pay $4,568 in federal income tax on the $40,000 converted, as shown below:

• 10% at $11,600 = $1,160
• 12% at $28,400 = $3,408
• Total tax = $4,568 or ($1,160 + $3,408)

However, those on a FIRE plan generally will have a number of years in early retirement (before they reach age 60), during which they may have a low income and consequently be in a low tax bracket. During these years, you can convert money into your Roth IRA and build a stream of tax-free income for your later retirement years.

Important

Since Roth IRA contributions are not tax deductible, they can be withdrawn tax-free at any time as long as you’ve had your Roth IRA for five years. That means even before you turn age 59½.

Roth IRAs in Early Retirement

When FIRE investors talk about Roth IRAs, it’s generally with regard to the type of Roth conversions that we’ve described above. However, Roth IRAs have some other advantages for FIRE investors, even without a conversion strategy.

For example, a Roth IRA can act as an effective (and tax-efficient) contingency or emergency fund. Because Roth contributions can be withdrawn without penalty (again, not the gains, only your original contributions), they can be used to cover a year when your other investments haven’t grown as they should or if you come up against an unexpected expense.

Similarly, Roth IRA withdrawals can be used as a source of additional cash flow that doesn’t impact taxes or healthcare premiums. FIRE investors will generally optimize their income to stay either under a particular tax bracket or within a particular range for healthcare premium purposes. Accessing some other types of retirement funds—selling shares of taxable accounts or taking a 401(k) distribution if you’re over age 59½ but under age 65 and not yet on Medicare—triggers taxable events. Taking your contributions out of a Roth account doesn’t trigger anything.

Finally, Roth IRAs are a good way to build your legacy. If part of your FIRE plan involves passing on wealth to your children (or grandchildren or great-grandchildren), Roth IRAs are a good vehicle for this. That’s because, unlike some other retirement accounts, Roth IRAs don’t have any required minimum distributions during the life of the owner—so the money in them can keep growing tax free.

What Are the Best Roth Individual Retirement Account (Roth IRA) Investments?

The best investments for Roth individual retirement accounts (Roth IRAs) are similar whether you are following a Financial Independence, Retire Early (FIRE) plan or a regular retirement plan. Good options include income-oriented stocks, growth stocks, and indirect and/or direct real estate investments.

Is a Roth IRA Good for FIRE?

Yes. Roth IRAs can form a valuable part of a FIRE strategy—as a long-term investment vehicle, a source of emergency funds, or part of a Roth IRA conversion ladder.

Is it Better to Invest in a Roth IRA or a 401(k)?

In many cases, a Roth IRA can be a better choice than a 401(k) retirement plan, as it offers a flexible investment vehicle with greater tax benefits—especially if you think that you’ll be in a higher tax bracket later in life.

The Bottom Line

Most FIRE investors think of Roth IRAs in the context of a Roth ladder: a chain of Roth conversions that can allow you to access your traditional retirement dollars tax-free in early retirement. However, Roth IRAs also have some other advantages for those on a FIRE plan, acting as a source of emergency income in retirement or as a way of passing on wealth to your heirs.

Just make sure that you understand the complexities of Roth IRAs—especially the distribution rules—before you build them into your FIRE plan.

PenFed offers money market, IRA, and Coverdell certificates with decent rates

Fact checked by Michael Rosenston

If you’re interested in potentially growing your cash savings at a faster rate, the money market certificates from PenFed Credit Union might be worth considering. These share certificates with rates of up to 3.20% are similar to the best certificates of deposit (CDs) available through many traditional and online banks. 

Members can open IRA certificates and Coverdell education savings certificates as well, both of which have the backing of National Credit Union Administration (NCUA) insurance. 

PenFed Certificate Rates
	APY
Money Market Certificate	2.8% – 3.20%
IRA Certificate	2.9% – 3.05%
Coverdell Certificate	2.9% – 3.10%

Compare PenFed CD Rates

When you research the rates and features that other credit unions and banks have to offer, you’ll be better prepared to decide if a savings certificate from PenFed Credit Union makes sense for you.

PenFed CDs: Key Features

PenFed Certificate Key Features
	Certificate Term	APY	Minimum Deposit
Money Market Certificate	6 months-7 years	2.8%-3.20%	$1,000
IRA Certificate	1-7 years	2.9% – 3.05%	$1,000
Coverdell Certificate	1-7 years	2.9%-3.10%	$500

In addition to PenFed Credit Union’s CD rates, it’s wise to evaluate the other features of its savings certificates. Of course, the potential to earn an attractive annual percentage rate (APY) on your savings matters. Yet there are other details that should influence your decision regarding whether or not to open an account as well. 

PenFed share certificates come with a $1,000 minimum deposit requirement (Coverdell education savings certificates have a $500 minimum). These requirements could be restrictive for some savers, depending on the amount of cash they have available and their savings goals. 

Like traditional CDs, the credit union’s money market certificates, IRA certificates, and education savings certificates all feature early withdrawal penalties. Depending on the terms of your account and how early you redeem your certificates, PenFed’s early withdrawal penalties may be a bit harsh. You could lose between 30% and 100% of your interest earnings if you withdraw the cash from your account before its maturity date arrives.

Pros and Cons of PenFed Credit Union CDs

Pros

• Competitive rates

• Credit union benefits

Cons

• Few branches

• Membership required

Pros Explained

• Competitive rates: Interest rates on PenFed certificates, which are up to 3.2% are higher than many other rates.
• Credit union benefits: Members of credit unions generally enjoy perks of better customer service and better rates than bank customers.

Cons Explained

• Few branches: This federal credit union has a small number of branches (around 50 in total), which could be a drawback for people who prefer in-person banking.
• Membership required: To qualify for PenFed’s certificates, you must be a member of the credit union. However, PenFen has an open charter and, therefore, anyone can join. 

About PenFed Credit Union

Pentagon Federal Credit Union, better known as PenFed, was established in 1935. PenFed Credit Union, an open-charter credit union that anyone can join, offers a variety of financial services to its members. With more than 2.9 million members and nearly $35.4 billion in assets, the almost 90-year-old financial institution is the second-largest federal credit union in the United States. 

PenFed is a credit union rather than a bank. So, you must become a member of the financial institution before you can open a money market certificate and enjoy the other benefits of using a credit union. Anyone can join. 

PenFed offers a number of other perks to its members, like competitive rates on its high-yield checking account and online savings account, along with easy options to qualify for monthly maintenance fee waivers. 

Alternatives to PenFed CDs

• High-yield savings accounts: If you’re willing to open an online savings account elsewhere, you may be able to earn higher rates than what PenFed CDs offer. See the best high-yield savings account rates to compare how much you could earn.
• High-yield checking accounts: You may find relatively high rates with some checking accounts. Be aware of their requirements and limits. The best high-interest checking accounts give you easy access to your money.
• Certificates of deposit (CDs): You can also choose from a range of CDs from other financial institutions.
• Money market account: Money market account can also provide a return on your savings. Check the best money market account rates to see how it compares.
• Treasury securities: These government-backed bills, notes, and bonds sometimes offer even higher rates than CDs and may be more liquid.

Frequently Asked Questions (FAQs)

Does PenFed Charge an Early Withdrawal Fee?

If you withdraw cash from a PenFed money market certificate, IRA certificate, or Coverdell education savings certificate before its maturity date, you’ll have to pay an early withdrawal penalty. Depending on your CD’s term and how early you withdraw cash from your account, that penalty could range anywhere from 30% to 100% of your dividend earnings. 

In general, it’s best to only consider depositing your savings in a CD or a share certificate if you’re confident you can leave the money in the account until it reaches maturity. If you think you might need access to your cash on a more frequent basis, a high-yield savings account or a money market account might be a better fit for your financial needs.

How Do You Open a PenFed CD Account?

Before you can open an account with PenFed, you’ll need to become a member of the credit union. You can apply online for membership (a process that involves opening either a Regular Share savings account or a Premium Online Savings account with the credit union). PenFed will perform a soft credit inquiry to confirm your identity when you apply for membership. 

Once you’re a member of the credit union, you can apply to open one of PenFed’s savings certificates—a money market certificate, an IRA certificate, or a Coverdell education savings certificate. You can complete your application for a savings certificate online, over the phone, or in person at a branch. 

Are PenFed CD Rates Guaranteed?

PenFed’s Money Markey Certificates work the same way that CDs work. The cash you deposit in a money market certificate with PenFed features a fixed interest rate. Therefore, the credit union guarantees a fixed return on your savings, provided you leave the deposit in your account for the full term and don’t withdraw any money early.

Are PenFed CDs FDIC-Insured?

All three types of savings certificates that PedFed Credit Union offers feature the security of insurance from the National Credit Union Administration (NCUA). The NCUA is the equivalent of the Federal Deposit Insurance Corporation (FDIC) for credit unions. As a result, you can rest easier knowing the deposits you make with the credit union are federally insured for up to $250,000.

Your Guide to CDs

• What Is a Certificate of Deposit (CD)?
• What Is a Brokered CD?
• What Is a CD Ladder?
• Pros and Cons of CDs
• How to Invest With CDs
• How to Open a CD
• How to Close a CD
• CDs vs. Annuities
• CDs vs. Stocks
• CDs vs. Mutual Funds
• CDs vs. ETFs
• CDs vs. Savings Accounts
• Short-Term vs. Long-Term CDs
• CD Rates News
• Best 1-Year CD Rates
• Best 18-Month CDs
• Best Jumbo CD Rates
• Best 6-Month CD Rates
• Best 3-Month CD Rates
• Best Bank CD Rates

We independently evaluate all recommended products and services. If you click on links we provide, we may receive compensation.

Here’s a simple system for assessing your fiscal fitness

Fact checked by Yarilet Perez
Reviewed by Andy Smith

Financial experts recommend running through a personal financial checkup at least once a year or after significant life events such as marriage, divorce, the birth of a child, or the death of a family member. This checkup helps you stay on track toward your financial goals and enables you to make any adjustments you need as your life or the economy changes.

This guide will walk you through each part of a complete financial checkup with a checklist of actionable steps to help set you up for future success.

Key Takeaways

• A financial checkup assesses each part of your finances.
• Experts suggest doing a financial checkup annually and after significant life events such as marriage, divorce, birth of a child, career change, or receiving an inheritance.
• Your checkup should examine all financial areas, including your budget, debt, savings goals, retirement accounts, credit reports, insurance coverage, and estate planning documents.
• The process doesn’t have to be overwhelming. You can break it down into manageable steps and tackle one area at a time.

1. Life Changes Review

To begin your financial checkup, take stock of any major life changes in the last year or since your last review. Common ones include changes to your job and any other income, changes to your relationship or family, relocations, major purchases, windfalls like an inheritance, unexpected expenses such as paying to repair storm damage to your home, and changes to your health that might mean you’ll need more or different health insurance.

For each change, consider how it affects your income, expenses, savings, insurance needs, and investing strategy.

2. Review and Assess Your Financial Goals

Next, check your progress toward your financial goals and set new ones as needed.

Set up or update your financial goals, organizing them by time frame:

• Short-term goals (within a year): Build an emergency fund, pay off small debts, save for a vacation, or make minor home improvements.
• Medium-term goals (one to five years): Save for a down payment on a house or vehicle, purchase a car, fund an education, or launch a business.
• Long-term goals (more than five years): Retirement planning, pay off a mortgage, fund children’s college education, or achieve financial independence.

Each goal should fit the widely used SMART framework:

• Specific: Clearly define what you want to accomplish
• Measurable: Include concrete amounts and dates
• Achievable: Set realistic targets
• Relevant: Align with your values and broader life objectives
• Time-bound: Establish a timeline with specific deadlines

Document your goals in writing and the specific actions needed to achieve them.

3. Review Your Budget

A budget serves as the foundation of your finances. During your checkup, review your income, expenses, and spending patterns to ensure your budget aligns with your income and goals.

Start by calculating your total monthly income from all sources:

• Primary job
• Side hustles or part-time work
• Investment income
• Rental property income
• Alimony or child support
• Government benefits

Next, list and categorize all your expenses. Consider using the following categories:

• Housing (mortgage/rent, utilities, maintenance)
• Transportation (car payments, gas, insurance, maintenance, public transit)
• Food (groceries, dining out)
• Healthcare (insurance, out-of-pocket expenses)
• Personal (clothing, entertainment)
• Debt payments (student loans, credit cards, personal loans)
• Savings and investments
• Miscellaneous (subscriptions, memberships, gifts)

Compare your actual spending over the past few months with what you originally budgeted. Look for discrepancies and patterns. Are there categories where you consistently overspend? Work to address any issues you see.

4. Review Your Debt

Begin by doing an inventory of all your debts:

• List each debt (mortgage, auto loans, student loans, credit cards, etc.)
• Note the current balance
• Record the interest rate
• Document the minimum monthly payment
• Note the time until the debt is paid off

Once you have this information, calculate your debt-to-income ratio by dividing your total monthly debt payments by your gross monthly income. Financial advisors often suggest using the 28/36 rule: your overall debt ratio should be less than 36%, with no more than 28% going toward housing debt.

If your debt levels are high, develop or refine your plan to pay off your debts. Consider these two popular approaches:

• Debt snowball method: Focus on paying off your smallest debt first, no matter the interest rate, while making minimum payments on all other debts. Once the smallest debt is eliminated, apply that amount to the next smallest debt, creating momentum as you progress.
• Debt avalanche method: Target the debt with the highest interest rate first, while making minimum payments on all other debts. This approach minimizes the total interest paid over time, though it can make it harder to see how much you’re progressing.

5. Check Your Credit Reports

Your credit report and score impact everything from loan approvals to insurance rates, making this review an essential part of your financial checkup.

Federal law entitles you to one free credit report annually from each of the three major credit reporting agencies: Equifax, Experian, and TransUnion. They are available through the official website, AnnualCreditReport.com, or by contacting each bureau directly.

6. Review Your Retirement Savings

Start by reviewing the balances in all your retirement accounts, including the following:

• Employer-sponsored plans (401(k), 403(b), 457, etc.)
• Individual retirement accounts (Traditional and Roth IRAs)
• Self-employed retirement accounts (SEP IRA, SIMPLE IRA, Solo 401(k))

Financial experts generally suggest saving 10% to 20% of your pretax income for retirement. At a minimum, ensure you’re contributing enough to your employer-sponsored plan to receive any matching contributions—this is essentially free money you don’t want to leave aside.

Next, review your investment allocations to confirm they align with your risk tolerance and time horizon. Generally, the closer you are to retirement, the more conservative your portfolio should become. Consider whether your current asset allocation (the mix of stocks, bonds, and other investments) needs rebalancing to match your risk profile.

7. Review Your Other Savings Goals

Your financial checkup should evaluate progress toward other important savings goals. First, check your emergency fund—typically recommended to be three to six months of income for essential expenses in an easily accessible account.

Review your progress on specific savings goals like a home down payment, getting a new car, education funds (529 plans or other college savings accounts), travel or vacation savings, and major purchases or renovations.

For each savings goal, determine whether your current savings rate will enable you to reach these goals on schedule or if adjustments are needed.

8. Make Sure You’re Properly Insured

Start with your life insurance. If you have dependents, confirm your coverage amount would adequately replace your income and cover major expenses like your mortgage or education costs. Review your beneficiary designations to confirm they reflect your wishes.

Check your health insurance to determine whether your current plan still meets your needs, then review your property insurance, including homeowners or renters insurance and auto insurance. Confirm that coverage limits adequately protect your assets.

Check out Investopedia’s How To Supercharge Your Savings in Your 40s & 50s for ideas about boosting what you put aside in your middle age.

9. Review Your Estate Plan

Even if your assets are relatively modest, estate planning ensures your wishes are carried out and minimizes complications for your loved ones. During your financial checkup, review all estate planning documents to confirm they’re current and aligned with your intentions.

Verify that your chosen executor or trustee is still the one you want and is willing to do the job. Check that the distribution of assets reflects your current wishes, especially if you’ve experienced significant life changes since your last update.

You’ll want to review your beneficiary designations on all financial accounts. These designations typically override instructions in your will, making them a crucial part of your estate plan.

10. Don’t Forget To Review Your Taxes

Review your tax withholdings to see if they’re correct. The IRS has an online Tax Withholding Estimator that does much of the work for you. Adjusting your withholdings can prevent owing a large sum at tax time or receiving an unnecessarily large refund (which essentially means you’ve given the government an interest-free loan).

If you’re self-employed or receive income that doesn’t have taxes automatically withheld, check your quarterly estimated tax payments. Inadequate or late estimated payments can result in penalties, even if you’re ultimately due a refund when you file your annual return.

The Bottom Line

A comprehensive financial checkup gives you a clear picture of your finances and helps ensure you’re making progress toward your goals. While it may seem like a big undertaking, breaking the process into these manageable steps makes it less overwhelming.

After completing your financial checkup, create a timeline for addressing each action item you’ve identified, starting with those that will have the greatest impact on your financial well-being.

Yes, but it may not be such a great idea…

Reviewed by Anthony Battle
Fact checked by Michael Rosenston

You can make a 401(k) withdrawal in a lump sum, but is it a good idea to do so? Usually, the answer to that is no. Tax-deferred retirement plans, such as 401(k)s, are designed to provide income during retirement.

In most cases, if you make any withdrawal and are younger than 59½, you’ll pay a 10% early withdrawal penalty in addition to income taxes on the amount you withdraw.

Here are some of the options available to withdraw a lump sum from your 401(k) and what you need to consider.

Key Takeaways

• You can make a 401(k) withdrawal in a lump sum, but in most cases, if you do and are younger than 59½, you’ll pay a 10% early withdrawal penalty in addition to taxes.
• You can take a 401(k) loan against your balance but will be subject to penalties if you default.
• A hardship withdrawal can give you retirement funds penalty-free, but only for specific qualified expenses and you’ll still owe taxes.
• You are limited to the lump-sum withdrawal options your plan allows.

Lump-Sum Withdrawal Options While Employed

Some companies automatically enroll eligible workers in a 401(k)—they can opt-out—while others let employees choose if and when they participate. Employers often rely on a plan sponsor to educate employees on the investments, benefits, and contribution limits of a 401(k) plan.

The majority provide sufficient direction to employees when they begin contributing to the plan, but they often fall short of providing useful information when employees change jobs, retire, or need to withdraw money from their plans.

If you want to avoid the 10% tax penalty when making a lump-sum withdrawal while still working and under 59½, you have two main options. The two most common lump-sum withdrawal provisions come in the form of a hardship withdrawal or a loan against your 401(k) balance. Of course, a loan isn’t a true withdrawal as you’ll have to pay it back to avoid the penalty. It may not be recommendable in the vast majority of cases, but you can of course also withdraw without hardship and pay the penalty. Some employers’ plans may restrict lump-sum withdrawals while you are still employed with them.

Hardship Withdrawals

A hardship withdrawal is a lump-sum withdrawal based on financial need that you do not need to repay. A hardship withdrawal must meet the IRS’s criteria, such as covering crippling medical expenses, to avoid paying the 10% early withdrawal penalty. You’ll still owe income taxes on the amount withdrawn.

There is another case where plan holders can make a lump-sum withdrawal from their plans without incurring the 10% penalty. According to Section 113 of the Setting Every Community Up for Retirement Enhancement (SECURE) Act—signed into law in December 2019—new parents are allowed to withdraw a maximum of $5,000 from their plans penalty-free to pay for adoption or birth expenses.

401(k) Loans

A 401(k) loan is typically paid back through paycheck deferrals over time. The loan is capped at a certain percentage of your total 401(k) balance. The IRS allows up to 50% and a maximum of $50,000 of vested funds, whichever is less.

If you have a 401(k) plan with the ability to take out a loan, you can withdraw the funds tax-free. Of course, you will have to pay them back, but this allows you to borrow from your 401(k) account and pay yourself back the interest and principal over time.

Options When You Leave an Employer

Lump-sum early withdrawal options are a bit more flexible when you leave an employer for another job or if you retire. Starting at age 55 (age 50 for state public safety employees) you can take a penalty-free lump-sum distribution from a previous employer’s 401(k) plan up to the total vested account balance. After placing a distribution request, the plan sponsor or custodian sends a check directly to you, and the account is closed with the custodian.

If you have a Roth 401(k) balance, no taxes are withheld as Roth plans contain after ta dollars. With traditional pre-tax traditional 401(k) plans, sponsors withhold taxes from the balance before cutting the check. In either case, if you are under 55 (50 for state public safety employees), you are subject to a 10% tax penalty.

If you’re not yet 55, you can avoid taxes and penalties by rolling over the lump-sum withdrawal into an individual retirement account (IRA). In this case, the check is made out to the custodian of the IRA, not to you—although it should be marked “for the benefit of” you. As you never received the funds in cash, you are not taxed.

If you’re switching jobs, another option is to roll over the 401(k) into the 401(k) at your new employer, if that new plan allows for this option. Review all your choices carefully before you decide.

Note

If not doing a direct rollover, funds withdrawn from your 401(k) must be rolled over to another retirement account within 60 days to avoid taxes and penalties.

Special Considerations for Withdrawals

The greatest benefit of taking a lump-sum distribution from your 401(k) plan—either at retirement or upon leaving an employer—is the ability to access all of your retirement savings at once. The money is not restricted, which means you can use it as you see fit. You can even reinvest it in a broader range of investments than those offered within the 401(k).

Since contributions to a 401(k) are tax-deferred, investment growth is not subject to capital gains tax each year. Once a lump-sum distribution is made, however, you lose the ability to earn on a tax-deferred basis, which could lead to lower investment returns over time.

Tax withholding on pre-tax 401(k) balances may not be enough to cover your total tax liability in the year when you receive your distribution, depending on your income tax bracket. Unless you can minimize taxes on 401(k) withdrawals, a large tax bill further eats away at the lump sum you receive.

Finally, having access to your full account balance all at once presents a much greater temptation to spend. Failure in the self-control department could mean less money in retirement. You are better off avoiding temptation in the first place by having the funds directly deposited in an IRA or your new employer’s 401(k) if that is permitted.

How Much Will I Get If I Cash Out My 401(k)?

If you cash out the entirety of your 401(k) you will get whatever is left over after taxes (and penalties if you are younger than age 59½). So, if you were 60 years old and had $1,000,000 in your 401(k), and you were in the 25% tax bracket, you would receive $750,000. If you were, say age 50 and in the same tax bracket, you would be subject to an additional $100,000 early withdrawal penalty, leaving you with $650,000. If you are separated from the job, the minimum age goes down a bit.

What Counts As a Hardship Withdrawal?

Hardship withdrawals can allow you to take out 401(k) money without paying the 10% early withdrawal penalty (but you’ll still owe the deferred tax liability). Qualified reasons include certain medical expenses, qualified education expenses, the birth or adoption of a child, purchasing a first home, funeral expenses, and permanent disability.

Can I Take My 401(k) in Installments?

Yes. In retirement, you can withdraw only as much as you need to live, and allow the rest to remain invested. You can also choose to use your 401(k) funds to purchase an annuity that will pay out guaranteed lifetime income.

Learn what it takes to open a money market account

Reviewed by Michael J Boyle

As interest rates rise from historically low levels, it is easy to focus on the negative effects this may have, such as the added costs of borrowing money. There is a positive side to higher interest rates, however, and that’s the higher yields investors are able to earn in the best money market accounts. In addition, recent changes to Regulation D have now allowed several banking institutions to waive the limit on transactions and lower minimum balance requirements, making this type of account even more attractive.

We take a look at exactly what a money market account is, how they work, and answer common questions to help you decide if this might be the right type of account for you.

How to Open a Money Market Account

Money market accounts are widely available at most banks and credit unions. Here are the steps you’ll need to take to open one.

Step 1: Choose a money market account that works for you. Choosing a money market account that is right for you is the most important step. As with any account, make sure that the account features, accessibility, and customer service offer what is essential to you. For example, opening an account that offers the highest interest rate is not necessarily the best option if it doesn’t offer a debit card, and that is a feature that you will need.    

Step 2: Prepare the necessary documents. In order to open any account at a bank you will need certain documentation to prove your identity. Make sure that you have gathered the correct documentation prior to your appointment or filling out your online application so the process goes smoothly.

Step 3: Make your first deposit. Depending on whether you open an account in person or online, you will need to make your first deposit. This can be done via a cash deposit or electronic funds transfer from another account that you already have.  

What You Need to Open a Money Market Account

As with opening any account at a banking institution, there are certain requirements and things you need to know. Here’s an overview.

Personal Information

In order to open a money market account, you will need to fill out an application to establish a relationship with the banking institution. Typically, these institutions will gather information from you regarding the following:   

• Full name 
• Address
• Date of birth 
• Social Security number 
• Employment status  
• Income
• Answer to security questions, such as your mother’s maiden name
• Government-issued ID, such as a driver’s license or Social Security card

Optional Account Information

• Whether you want to add a joint owner
• Whether you want to add a beneficiary
• If you want to receive checks to use with your account
• If you want to receive a debit card for use with your account

Minimum Deposits

Historically, money market accounts required higher minimum deposits in order to open and maintain the account. However, with the more recent changes to Regulation D decreasing reserve requirements to zero, and growing competition with alternative and online banking options, many banking institutions have lowered the minimum deposit for these types of accounts. Each banking institution has its own requirements, so it is important to compare what features are offered by each bank before deciding which option is best for you.  

Know The Basics

Money Market Accounts vs. Other Bank Accounts

While money market accounts are considered traditional deposit accounts by the FDIC, they do offer additional unique features, as compared with many conventional bank accounts at conventional banks. 

High-Yield Savings Account

A high-yield savings account offers a higher interest rate than the current APY for a traditional savings account. While your money will earn a higher rate of interest, there may be fees associated with some account services, such as wire services or cashier’s checks. You also may not have access to your money right away–deposited funds may not be available for a few days, and likewise, when withdrawing funds, access could take a few days.

Checking Account

A checking account typically earns no interest, although some interest checking options are available. This type of account is very liquid, as money can be accessed easily through writing a check, using your debit card, or withdrawing cash from your bank or an ATM. Checking accounts are used primarily for daily purchasing activity or bill payment.

Certificate of Deposit (CD)

A certificate of deposit is an investment product which yields a higher interest rate than a savings account. But in order to earn the higher rate, you must invest in the CD for a specific number of months or years. Typically, the longer the term of the CD, the higher the rate of return. Another characteristic worth considering is that this type of account is not very liquid, in that you may incur a penalty or fees for withdrawing your money prior to the term of the CD.

Factors to Consider When Opening a Money Market Account

Before opening a money market account, it’s important to research the following factors to find which account will best suit your financial needs.

Annual percentage yield (APY): APY is the interest rate which your money will be earning– obviously, the higher the better. While many banks are moving away from requiring minimum deposits, you may be able to earn a higher interest rate if you have a substantial amount of money to deposit and you are able to maintain that larger balance. 

Fees: Most banking institutions do not charge monthly fees. However, there may still be fees associated with account transactions. While Regulation D changes have allowed banks to lift limits on account transactions, many institutions may still charge a fee for transactions beyond six per month.

FDIC insurance: Because money market accounts are considered traditional deposit accounts by the FDIC, they are insured up to $250,000, just as any other deposit account at an FDIC bank. This can provide peace of mind for bank customers knowing that their money will be there, especially in unstable economic times.

Transaction limits: Recent changes to Regulation D has removed the six-per-month limit on transactions in deposit accounts. However, it has not required banks to do so. Each banking institution has the flexibility to implement the new changes as they wish. This may mean that some banks still limit account holders to only six monthly transactions, or may charge a fee for additional transactions beyond the initial six, for example. If you feel that you will need more than six monthly transactions, make sure you know where your banking institution stands on this policy before opening your money market account.

Check-writing privileges: With many banks that offer money market accounts being brokerage institutions or online banks,check-writing can be a convenient way to access your money or pay certain bills. Not all money market accounts offer this option, so make sure you know if this is a feature that will be available to you.

Banking options: If you plan on using your money market account like a bank account, to pay monthly bills or make debit card purchases, you will need to make sure that your account offers those options or if there are any fees associated with those types of transactions.  

FAQs

What Is a Money Market Account?

Money market accounts are a blend of a savings and checking account. This type of hybrid account incorporates the advantage of earning higher interest rates with the benefits of check-writing and debit card use. In a market of rising interest rates, it makes sense to utilize a money market account to earn additional interest on savings and checking balances.    

Historically, money market accounts have mandated higher minimum balance requirements and limited transactions to only six per month, which made this type of account perfect for access to liquidity at a higher interest rate, but not necessarily good for daily use as your go-to debit card. 

Due to financial events relating to the COVID-19 pandemic, however, Regulation D was amended to suspend the institutional reserve requirements to zero, and “delete the six-per-month limit on convenient transfers from the “savings deposit” definition,” thereby allowing unlimited transactions for customers. But account holders still will need to check with their financial institution for specific details on how this regulation may affect their particular account, as the interim rule does not specify that depository institutions are obligated to change their account agreements with customers or the manner in which they must make changes, if they decide to do so. 

Money market accounts are considered traditional deposit accounts, and as such are FDIC-insured up to $250,000 per account depositor. With the news of bank failures in March 2023, knowing that these types of accounts are covered by FDIC insurance gives customers peace of mind knowing that their deposits are safe.

What Are the Limits of a Money Market Account?

Money market accounts are great for earning higher interest rates on your cash savings. At the same time, though, there are some limits to what account holders are able to do with a money market account.

• Transactions may be limited to only six-per-month.
• Transactions beyond those six may have fees associated with them, if permitted. 
• Account owners may be required to maintain a monthly minimum balance in order to receive a certain APY.

What Should You Use a Money Market Account for?

Even if you have check-writing or debit card privileges, you may not be able to use your money market account to pay monthly bills or make everyday purchases as you would a typical checking or savings account. Recent changes to Regulation D have allowed banking institutions to remove these restrictions on money market accounts if they so choose to.  

Because many banks have lowered the minimum required balance to open a money market account, it does make these accounts quite attractive for investors looking to earn a higher rate on their savings. While you may be able to use a money market account for more than six transactions per month, if your financial institution still has the six-per-month limit in place, this account is perfect to have as a savings account that you access only occasionally.

How Safe Are Money Market Accounts?

Money market accounts are FDIC insured, meaning that account holders can rest assured that their accounts will be protected up to $250,000 per account depositor. It is important to make sure that the financial institution you choose to open up an account with is an FDIC-insured institution.

Are Money Market Accounts Taxed?

Interest earned on money market accounts is, in fact, taxable. As with any account that earns interest, you will receive a 1099-INT to report your earnings when you file your taxes.  Everyone’s financial situation is different, so for specific information about how this might affect your tax situation, you would need to consult a tax professional.

Yes, so long as you qualify to make a Roth IRA contribution

Reviewed by Eric Estevez
Fact checked by Betsy Petrick

If you don’t need your required minimum distributions (RMDs) from your traditional individual retirement account (IRA) for living expenses, can they be reinvested in a Roth IRA? Fortunately, they can—assuming that you’re eligible for a Roth based on your income.

This is because the money to fund your IRA can come from any pool of cash that you have available; however, you still need to pay attention to the contribution limits and earned income requirements.

Key Takeaways

• For 2024 and 2025, you can contribute a combined total of $7,000 to your IRAs ($8,000 if you’re age 50 or older).
• Roth IRA holders aren’t required to take required minimum distributions (RMDs).
• Internal Revenue Service (IRS) income limits determine one’s eligibility for a Roth IRA.
• RMDs must be withdrawn a final time before converting a traditional IRA to a Roth IRA.
• RMD funds can be reinvested into different types of accounts, such as mutual funds, stocks, and 529 education savings plans.

How Required Minimum Distributions (RMDs) Work

Traditional individual retirement account (IRA) contributions are made with pretax dollars; in return, taxpayers are allowed to claim a deduction for the tax year in which the IRA contribution was made. On the other end, IRA distributions are taxable as income and may be subject to an IRS penalty if withdrawn early.

Roth IRA contributions, on the other hand, are made with after-tax dollars. So, while you don’t get an up-front tax break, you can withdraw the money tax-free in retirement.

Owners of traditional IRAs–as well as of Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRAs– must begin taking annual required minimum distributions (RMDs) at the age of 72. But there is an exception. Your RMDs must start at age 73 if you reach age 72–not 73–after Dec. 31, 2022.

RMD amounts are calculated based on the total amount saved in all of your traditional IRAs; however, there are no RMD mandates for Roth IRAs during the owner’s lifetime, making them ideal wealth-transfer vehicles. Any money in the IRA that you don’t need can stay in the account and be passed on to your heirs.

Investing an RMD Into a Roth IRA

For the 2024 tax year, the annual contribution limit to an IRA is $8,000 if you’re 50 or older. That limit is the total for all of your IRAs—traditional and Roth. (The limits are $1,000 less for anyone under age 50.) These limits remain the same for 2025.

The Internal Revenue Service (IRS) requires that you have enough earned income to cover your Roth IRA contribution for the year—but the actual source of your contribution need not be directly from a paycheck.

If your RMD was $8,000 or less, you could deposit all of the money into your Roth IRA. However, if you contributed $4,000 to another IRA in the same year, you could place just $4,000 of your RMD into a Roth IRA.

Note

The IRS prohibits account holders from converting RMDs directly to a Roth IRA.

There are also Roth IRA contribution rules based on your income and tax-filing status. If your modified adjusted gross income (MAGI) is in the Roth IRA phaseout range, then you can only make a reduced contribution. You can’t contribute at all if your MAGI exceeds the upper limit for your filing status.

Here’s a rundown:

2024 Roth IRA Income Limits
Filing Status	2024 MAGI	2024 Contribution Limit
Married filing jointly or qualifying widow(er)	Less than $230,000	$7,000 ($8,000 if age 50 or older)
	$230,000 to $239,999	A reduced amount
	$240,000 and above	Zero
Single, head of household, or married filing separately (and you didn’t live with your spouse at any time during the year)	Less than $146,000	$7,000 ($8,000 if age 50 or older)
	$146,000 to $160,999	A reduced amount
	$161,000 and above	Zero
Married filing separately (and you lived with your spouse at any time during the year)	Less than $10,000	A reduced amount
	$10,000 and above	Zero

2025 Roth IRA Income Limits
Filing Status	2024 MAGI	2024 Contribution Limit
Married filing jointly or qualifying widow(er)	Less than $236,000	$7,000 ($8,000 if age 50 or older)
	$236,000 to $245,999	A reduced amount
	$246,000 and above	Zero
Single, head of household, or married filing separately (and you didn’t live with your spouse at any time during the year)	Less than $150,000	$7,000 ($8,000 if age 50 or older)
	$150,000 to $164,999	A reduced amount
	$165,000 and above	Zero
Married filing separately (and you lived with your spouse at any time during the year)	Less than $10,000	A reduced amount
	$10,000 and above	Zero

Avoiding RMDs

There is the option to convert your traditional IRA into a Roth IRA—also known as a Roth IRA conversion. Since Roth IRAs don’t have RMDs, you will no longer be required to take annual withdrawals once the funds are in the Roth.

Important

Remember, Roths don’t have an up-front tax deduction for the initial contributions. But qualified withdrawals in retirement are tax-free. And there are no RMDs during the owner’s lifetime.

However, the Roth IRA conversion is a taxable event—and the tax bill can be big. Since you received a tax deduction on the contributions into your traditional IRA, you need to pay those deferred taxes on the converted funds.

It’s a good idea to check with a tax professional to determine whether a conversion would make financial sense for you, as there are other factors to consider besides the RMD issue. For example, converting money from a traditional IRA to a Roth could also push you into a higher tax bracket, meaning that your marginal tax rate could be higher for that year.

If you decide to convert to a Roth IRA, remember to take an RMD from the traditional IRA one last time for the year of the conversion. That’s necessary because the traditional IRA still existed during that year.

Tax Consequences for Converting RMDs

An RMD can be used in many ways, such as for discretionary spending or to supplement retirement income.

RMDs can be reinvested, except in most retirement accounts like traditional and Roth IRAs. How funds are taxed depends on the type of investment vehicle.

For example, profits from the sale of stock are taxed as capital gains. Owners of mutual funds typically pay taxes on earnings and dividends while holding the funds. Then, when mutual fund shares are sold, the earnings are taxed as capital gains.

Another popular option is to invest the RMD into a 529 savings plan, which provides money for education costs, such as apprenticeships, education expenses for students in primary, secondary, and postsecondary institutions, and student loan repayments. In a 529 plan, the funds accumulate on a tax-deferred basis, and qualifying events allow funds to be withdrawn tax-free.

Qualified Charitable Distribution

IRA holders can satisfy RMD mandates by taking qualified charitable distributions (QCDs)—which are nontaxable withdrawals from qualified plans made directly to charities. QCDs up to $105,000 count toward the RMD amount in 2024.

To qualify as a QCD, the account holder must be at least 70½ years old, and the distribution must be made from the eligible account by December 31 (no later than April 15 of the year following the first RMD year). Also, the distribution must be paid directly to the eligible charity.

Be careful about your choice because not all charities qualify. For instance, the charity cannot be a private foundation, a donor-led charity, or a charity where the donated funds directly support the donor. The charity also cannot be a supporting organization—a charity that supports other charities.

QCDs that exceed the RMD will not count toward future RMDs. Although reportable, the distribution is not subject to taxation and is not deductible. If a withdrawal is taken and the funds are later contributed to a charity, then the distribution is taxable as income. The funds must be withdrawn as a QCD.

Are Required Minimum Distributions (RMDs) Considered Earned Income?

No, a RMD is not considered earned income. However, the IRS treats RMDs from traditional IRAs as ordinary and therefore, taxable income. Although Roth IRA owners are not required to take RMDs during their lifetime, upon their death, designated beneficiaries are required to do so. In contrast to traditional IRAs, Roth RMDs that represent cost basis are not taxable as income.

How Do You Convert a Roth and Manage an RMD Withdrawal in the Same Tax Year?

If you are an account holder who is required to take an RMD, you must make the withdrawal before converting your account to a Roth IRA.

Are There Age Limits on When You Can Convert a Traditional IRA Into a Roth IRA?

There are no age limits on when a traditional IRA can be converted into a Roth IRA.

Can I Contribute to an IRA if I’m Taking RMDs?

Provided that you have earned income, you can contribute to a traditional or Roth IRA even if you’re taking RMDs. This strategy may help you lower your taxable income and build retirement savings. Consult with a tax professional if you have specific questions about your situation.

At What Age Am I Too Old To Contribute to a Roth IRA?

There are no age limits for contributing to either a traditional or Roth IRA. However, there are income and contribution limits, as well as rules around withdrawing earnings and paying taxes. So, while you’re never too old to contribute to an IRA, this strategy won’t make sense for every investor.

The Bottom Line

Roth IRAs have no RMDs during the account owner’s lifetime. So, if you don’t need the money, you can leave your Roth alone to continue growing tax-free for your heirs. Traditional IRAs don’t have the same flexibility, and you must start taking those RMDs at age 73—whether you want the money or not.

Still, as long as you have enough earned income for the year to cover the contribution and you don’t exceed the income limits, you can deposit your traditional IRA’s RMDs into your Roth. This can be a smart way to boost your Roth IRA while following the RMD rules for your traditional IRA.

Fact checked by Vikki Velasquez

If you have a traditional individual retirement account (IRA), the Internal Revenue Service (IRS) requires you to withdraw a minimum amount from your retirement savings each year once you reach a certain age—currently 73. 

These withdrawals, known as required minimum distributions (RMDs), have important tax implications to consider as you plan your retirement strategy. If you don’t withdraw the required amount on time, you can face steep penalties, which is why it is important to be aware of the rules and tax implications for these accounts.

Key Takeaways

• Required minimum distributions are mandatory withdrawals from certain retirement accounts, such as traditional IRAs, that must follow IRS rules or incur tax penalties.
• To calculate your RMD, divide your account balance as of Dec. 31 of the previous year by the IRS distribution period number corresponding to your age.
• If you miss your RMD deadline, you could owe a tax penalty of up to 25% on the undistributed amount.

What Are the Important Rules to Know?

To avoid tax penalties, taking your annual RMD from your traditional IRA before Dec. 31 is important, starting at age 73. If you fail to do so, you’ll be subject to up to a 25% tax on the outstanding RMD amount.

There is one exception: In the first year you’re required to take an RMD, you can delay your withdrawal until April 1 of the following year. However, you’ll need to take two distributions that year—one for the prior year and one for the current year.

Note

The SECURE Act 2.0 changed the tax penalty of missed deadlines to 25% in December 2022, down from 50% in years prior.

It’s worth noting that the IRS changes the rules for RMDs often, so it’s important to stay up to date with any changes, or consult with a tax advisor to achieve the most tax-efficient outcomes.

How Do You Calculate Your RMD?

Knowing your RMD requirements is an important part of tax planning, and the first step includes calculating the formula for annual withdrawals after you reach a certain age.

While it’s possible for your IRA provider to automatically calculate these distribution amounts for you, it’s valuable to know what to expect since these withdrawals are treated as taxable income each year under IRS rules. 

These taxes are based on your income tax bracket, which ranges from 10% to 37% in 2024 and 2025.

The basic formula is:
IRA balance as of Dec. 31 of the previous year ÷ IRS life expectancy factor = RMD

For example, if your IRA balance was $1 million and your life expectancy factor is 26.5 (based on IRS tables for age 73), your RMD for the year would be $37,736.

The Investor.gov website provides a useful calculator to help calculate your RMD amounts for each year.

Typically, these withdrawal amounts increase over time as you get older, which is important to be aware of since it will impact your overall tax strategy in retirement. In the following table, we show the life expectancy factor determined by the IRS based if a person meets either of the following conditions:

• Unmarried
• Married, but their spouse is 10 years younger than the account owner or less
• Married, but their spouse isn’t the sole beneficiary of the account

IRS Uniform Lifetime Table
Age	Distribution Period in Years
72	27.4
73	26.5
74	25.5
75	24.6
76	23.7
77	22.9
78	22.0
79	21.1
80	20.2
81	19.4
82	18.5
83	17.7
84	16.8
85	16.0
86	15.2
87	14.4
88	13.7
89	12.9
90	12.2
91	11.5
92	10.8
93	10.1
94	9.5
95	8.9
96	8.4
97	7.8
98	7.3
99	6.8
100	6.4

The life expectancy factor differs according to your circumstances, so it’s important to check these tables carefully by checking their website or consulting with an advisor. In sum, by planning your withdrawals based on the above steps, you can help create the most tax-efficient outcomes in your retirement strategy each year.

Common Misconceptions With RMDs

Navigating RMDs can be complex, and among the most common misconceptions with RMDs is that these withdrawals are required to stay in your bank account. 

“Individuals are sometimes disgruntled because they may not need the whole RMD and want to stay invested in the market,” says David Bigelow, a wealth manager at Coldstream Wealth Management. “They’re excited to learn that although dollars must leave the IRA and be taxed, the proceeds are theirs to do as they please, including being reinvested within a taxable investment account, if desired.”

Another way to minimize tax costs on these withdrawals is by making charitable donations through a Qualified Charitable Distribution (QCD). “Clients will often make a few QCDs early in the year to ‘chip away’ at the remaining RMD required that year,” says Bigelow.

Overall, clients can take different avenues for maximizing their retirement funds while reducing their tax burden in their broader retirement strategy.

The Bottom Line

RMD withdrawals have a meaningful impact on your traditional IRA balance. For this reason, it is important to plan carefully and stay up to date with IRS rules. The good news is that with strategic planning, you can make the most out of these funds by keeping a certain amount invested in the market in a taxable account or donating funds to charity as RMD amounts increase over time.

Filing your federal tax return to the Internal Revenue Service (IRS) starts with having the right forms in hand. Whether you choose to e-file or submit a paper return, being well-prepared is essential to submitting your tax return on time and without mistakes.

This guide will help you find the IRS forms you need, submit them securely, and avoid common tax filing errors.

Key Takeaways

• All federal tax forms are available for free at IRS.gov.
• The right tax software can help you identify and complete the right forms for your situation.
• E-filing is faster and more secure than mailing a paper return.
• If you’re missing a form, check your IRS transcript or file a substitute form to avoid delays.

How to Find Tax Forms on the IRS Website

The IRS makes all current tax forms available for free on IRS.gov. To find a form, you can:

• Visit the “Find forms & instructions” section and search by form number or name
• Use the site’s search bar to locate a specific form quickly

If you’re using tax software, you don’t need to search for forms manually. These programs include the necessary forms and guide you through questions about your income, deductions, and other details to complete your return accurately.

Important

Tax Day usually falls on April 15, unless it lands on a weekend or holiday. Federal tax returns for 2024 are due on Tuesday, April 15, 2025.

Common Forms and Schedules You Might Need

Most taxpayers use Form 1040. Seniors 65 and up can use Form 1040-SR. Depending on your tax situation, you may also need additional schedules. Some of the most common ones include:

• Schedule A for itemizing deductions
• Schedule B for interests and dividends
• Schedule C for freelance or self-employed income
• Schedule D for capital gains and losses
• Schedule 8812 for the Child Tax Credit

The IRS website offers a complete list of schedules and instructions for each.

Prepare to File

Filing your taxes on time and accurately requires preparation. Here are the steps you’ll need to take.

• Track your tax forms: Keep an eye on any investment or side income forms (such as 1099s). Set reminders to download them and upload them to your tax software.
• Organize your documents: Store all your tax forms, receipts, and prior-year returns in a secure folder, whether digital or physical. Use a checklist based on last year’s return to make sure you don’t forget anything.
• Use secure systems: Electronic filing or “e-filing” is safe through trusted tax software or the IRS website. Use a secure Wi-Fi connection and up-to-date antivirus software, and avoid filing on public networks or computers.
• Know your deadlines: The IRS began accepting 2024 returns on January 27, 2025. Taxes are due by April 15. You can file for an extension, but payment is still due by the deadline to avoid penalties.

Filing Options: Online or By Mail

You can file your federal tax return either electronically or by mailing a paper form.

E-filing is typically faster and includes automatic error checks. The IRS also partners with tax software providers through Free File to offer no-cost e-filing. To be eligible, your Adjusted Gross Income (AGI) must have been below $84,000 in 2024.

If you prefer to mail your return, you can download fill-able PDFs from the IRS website, enter your information, print the forms, and send them by mail. Paper returns can take longer to process, but some filers prefer this method for privacy reasons or because of limited internet access.

Advisor Insight

“If you use a paid preparer to file your tax returns, make sure that they have you sign an e-file signature authorization, such as Form 8879, before they electronically file your return,” cautioned Logan Allec, a CPA and owner of tax relief company Choice Tax Relief. “Also make sure that the amounts on lines 1-5 of this form match the information on your Form 1040.”

What to Do If You’re Missing a Form

If you haven’t received a form, follow these steps:

1. Check your email and financial accounts: Many issuers send forms electronically instead of mailing them.
2. Review your IRS transcript: Log into your IRS Individual Online Account and check for a Wage and Income Transcript, which shows forms already sent to the IRS by employers or banks. Keep in mind that it may be incomplete early in the season.
3. Use a substitute form: If you are missing a W-2 or 1099-R and cannot get a corrected version before the deadline, the IRS allows you to use Form 4852 as a substitute to report your income.

“Round up rather than down when estimating income. The IRS penalizes under-reporting, not overstatement made in good faith,” explained Chad D. Cummings, CPA, Esq., Attorney and CPA at The Law Office of Chad D. Cummings.

Reminder

If you are close to the deadline, file an extension. Just remember, an extension gives you more time to file, not more time to pay. Estimate what you owe and pay by Tax Day.

Cummings also recommends, “Add a memo to your return describing the reconstruction method used. This establishes a paper trail and gives you audit protection. You may amend later with the actual form if received post-deadline, but you will avoid late filing penalties and interest accrual.”

The Bottom Line

Finding and filing your federal tax forms doesn’t have to be stressful. With the right preparation, you can find the tax forms you need, choose the best way to file, and submit your return accurately and on time.

Whether you are e-filing with tax software or mailing paper forms, staying organized and using tools like IRS.gov or your IRS transcript can make the process easier. If a form is missing, take action early and consider options like filing an extension or substitute form to stay on track. Just be sure to estimate and pay any taxes owed by Tax Day to avoid penalties.

Fact checked by Vikki Velasquez

With its small-town charm, surprising affordability, and special combination of history, culture, and easy access to nature, it makes sense that the city of Utica, New York, has been ranked a top retirement destination. This Oneida County city of just over 63,000—once a key part of the Rust Belt textiles industry—has revitalized itself as a popular destination for outdoor enthusiasts and culture mavens alike.

Key Takeaways

• Utica, New York, offers a lower cost of living than other parts of New York and the U.S.
• The city boasts rich cultural and historical attractions like the Munson Pratt Art Museum and the Stanley Theatre.
• Outdoor and recreational activities are abundant, with proximity to the Adirondack Mountains.
• A strong sense of community and engaging lifestyle options are available for retirees.
• Oneida County, where Utica is located, provides over 300 health care establishments and 14 hospitals.

Cost of Living in Utica, NY

One of the most important factors for many individuals approaching retirement is the cost of living. For those without a steady income, keeping costs to a minimum while maximizing opportunities for enriching experiences and being part of a lively community is key. Fortunately, Utica offers a compelling case as an affordable destination for retirees.

Oneida County has a median household income of just $68,819, while the median household income nationwide as of 2023 was $80,610. At the same time, the median home value for the county is $171,100, which is less than half the median sale price of a home across the U.S. of $419,200.

Monthly housing and food costs for Oneida County are also well below average, at $961 and $636, respectively. Compare that with the average monthly housing and food costs across the country for 2023, which came in at around $2,120 and $832. Monthly taxes for Oneida County are, on average, $689.

Note

The state of New York does tax withdrawals from retirement accounts like some IRAs, 401(k)s, and pensions, although the first $20,000 of retirement income is tax-exempt.

Health Care and Accessibility

Health care is an important consideration when planning a retirement destination, and fortunately, Utica has access to a large number of facilities and services. With 379 health care establishments and 14 hospitals in Oneida County, Utica residents have many options to choose from. For comparison, that means Oneida County has the same number of hospitals as the entire state of Hawaii.

Utica is located about 240 miles northwest of New York City and about 95 miles west of Albany. While a number of regional and smaller airports are easily accessible from Utica, the closest major airport to the center of Oneida County is Bradley International in Hartford, Connecticut, about 169 miles away.

The city also offers public transportation through the Centro of Oneida bus service. What’s more, Utica residents can take advantage of the city’s rich history as a railway hub by hopping an Amtrak train to New York City (about 5 hours and 36 minutes in total) or any number of other destinations across the northeast and farther afield.

Lifestyle and Recreational Activities

With its gorgeous Philip Johnson-designed building, the Munson Pratt Museum is a haven for art and architecture enthusiasts in upstate New York. But that’s not the only place of interest for those passionate about arts and culture. The Stanley Theatre presents theater, music, comedy shows, and more, while a range of breweries, distilleries, and restaurants in and around the historic downtown appeal to lovers of food and drink.

Retirees interested in history will find plenty in Oneida County, which has a history dating back to the colonial era. The county has an impressive 92 arts and entertainment establishments to keep residents busy.

Close to the Adirondack Mountains, Utica is a wonderful starting place for those interested in hiking, biking, winter sports, and other outdoor activities. Further, with a relatively low climate risk level by FEMA, Oneida County is not likely to experience significant impacts from climate change in the near term.

The Bottom Line

Utica is often overlooked by those looking to retire in the northeast. However, this small city has an impressive combination of affordability relative to the region and the entire country more broadly. It offers easy access to health care and plenty of arts, culture, and outdoor recreation opportunities to cater to various interests. Though it may be an under-the-radar option, it’s worth considering Utica, New York, as a potential retirement destination.