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Life Events

The Ultimate Layoff Survival Guide

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Paul Catala, a 53-year-old entertainment reporter in Lakeland, Fla., knows firsthand about the struggles of unemployment. He was the victim of massive layoffs at a Tampa-area newspaper in December 2012. The result? A severance package of about $1,500.

“I was pretty much financially panicked,” Catala told MagnifyMoney, who also lost his health insurance. “All I had was my severance and nothing more than a couple thousand dollars in savings.”

As a single guy, he didn’t have a spouse’s salary to fall back on, but he made it work. During the year and a half that followed, he patched together a steady income by picking up a string of odd jobs and side gigs (more on this in a bit) before eventually securing a full-time job.

In 2017 alone, at least 255,000 planned job cuts have been announced, according to a report put out by the firm Challenger, Gray & Christmas. (The bright spot, however, is that the report also found that job cuts are on the decline.)

If you’re newly unemployed and not sure how to move forward, this ultimate layoff survival kit is for you. Here’s everything you need to know about weathering the storm.

What to do when you lose your job

Step one: Don’t freak out

If the financial implications and the stress of having to find a new job have your head spinning, you’re not alone. The longer you’re unemployed, the more likely it is to take a toll on your psychological well-being. According to a 2013 Gallup survey, roughly 20 percent of Americans who’ve been unemployed for a year or more have been affected by depression.

But while it’s certainly wise to make a plan, don’t take such a long view that you’re overwhelmed by the enormity of unemployment. As the old saying goes: “Inch by inch, life’s a cinch. Yard by yard, life’s hard.”

Do one thing at a time to avoid “analysis paralysis” (aka feeling so overwhelmed that you take no action at all).

Step two: Exit your current job with grace

Getting laid off hurts, but think twice before storming out in a blaze of glory.

“Anything you can do to leave on a good note is a good idea,” career coach Angela Copeland tells MagnifyMoney. “Thank-you notes and goodbye lunches all help to give positive closure.”

The last thing you want to do is burn bridges on your way out. When applying for new jobs, Copeland says you’ll be asked for references the hiring manager can call, which will likely include your previous employer. It’s in your best interest to keep these relationships positive.
Negotiating your severance package before hitting the road may also be on your to-do list.

“Some people have been able to negotiate an extra month of severance because they’ve been there longer and can quantify what they’ve brought to the job,” said Shannah Compton Game, certified financial planner and host of the “Millennial Money” podcast.

“Try and correlate it to something positive, like revenue or growth you’ve been able to do for the company,” she said. “Keep good records of the successes you’ve had because you just never know when you’ll be able to use that.”

On a similar note, you might be able to use rumors of impending layoffs to your advantage. Game says that it’s usually the people in the early rounds of layoffs who get the better severance packages. If you’re likely to be on the chopping block, volunteering to be let go sooner rather than later could be used as a bargaining chip to secure a better severance package.

Step three: Get your finances in order

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Before you panic, sit down and do a thorough audit of your financial situation. List all your monthly expenses, from fixed costs like rent and utilities to discretionary spending like entertainment costs. Then factor in any income you still have, like unemployment benefits (we’ll dive into how to apply in a minute), a severance package, and any cash you have coming from side gigs or passive income streams.

Now for the obvious question: What does your savings account look like?

“The goal marker is to have three to six months’ worth of fixed expenses saved in your emergency fund,” said Game.

To help curb temptation, she recommends parking it in an interest-bearing savings account that’s separate from your regular bank. (We’ve rounded up the best online savings accounts here.) If you’ve got an emergency fund, getting laid off is as good a time as any to dip into it — that’s what it’s there for. Of course, the idea is to make your savings last as long as possible. This is why Game suggests retooling your budget right out the gate.

“Is there anything in there you can cut, or at least make better?” she asked. “Can you negotiate a better cellphone or internet plan? Are you overpaying in some areas? When you’re unemployed, every dollar helps.”

Another thing to think about is your 401(k). Getting laid off makes you ineligible to take out a 401(k) loan, according to Game, but you can withdraw from it — for a hefty price.

“If you pull out of your 401(k) and you’re under 59½, you’ll have a 10-percent penalty, plus whatever you take out is added to your taxable income, so it could shock people if they took out a sizeable amount,” warned Game, who also recognizes that sometimes you don’t have any other choice.

Tapping your nest egg should be an absolute last resort. If it comes to that, Roth IRAs are a little more appealing because you can pull out your contributions at any time without tax or penalty (It’s just the appreciation you can’t touch until you’re over 59½). If you’re financially stuck between a rock and a hard place, a Roth IRA could serve as an extra backup emergency fund.

As for a 401(k) from your old job, Game says you have a couple of options. Some companies will let you do a direct rollover, which is a hands-off option that’s way easier than rolling it over yourself. This way, you won’t get a check for that cash.

“If you do, you have to have it deposited into your new account in a short time period so you don’t get taxed on that amount, which is why it’s better to do these things electronically whenever possible,” said Game.

No emergency fund or Roth IRA to tap into? You’re not out of options. Read on for more ways to access cash during unemployment.

Step four: Rev up your job hunting efforts

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“One of the biggest mistakes I see from people who’ve been recently laid off is that the experience is so stressful that they want to take a break,” said Copeland. “They think, ‘I need a few months to take some time for myself.’ What they don’t understand is that the longer you wait, the harder it becomes.”

Begin by dusting off your resume and updating it with any relevant new skills, accomplishments, and/or trainings you’ve completed. Do the same for your LinkedIn profile, which includes adding keywords that potential employers may be searching for (To get an idea of what these are, Copeland suggests browsing job postings you’re interested in). You’ll also want to follow companies on LinkedIn and connect with influencers within those organizations.

When it comes to references, Copeland adds that asking folks to leave you a written, public recommendation on LinkedIn can do wonders. Future employers are going to be looking at your profile. Seeing that people you’ve worked with have positive things to say is going to make them much less suspicious that something negative happened at your old job.

One other thing: Fine tune your elevator pitch so you’re ready to comfortably, and confidently, talk about yourself at a moment’s notice. After that, step away from your computer and get yourself out there (literally).

“A lot of people are told to apply online — ‘If you’re a good fit, we’ll call you ‘— but very rarely is that true,” said Copeland.

“It’s one-on-one personal connections that are going to help you find a job, and those people will be most helpful and empathetic very soon after you’ve been laid off.”

Let your network know you’re actively looking for work, attend industry events, and reach out to people for informational interviews. In some cases, this might mean cold emailing a colleague of a colleague and asking to pick their brain over coffee. They could always say no, or even ignore you, but Copeland says that when up against unemployment, this isn’t the worst thing in the world.

Step five: Protect yourself against the worst-case scenario

If your job hunt stretches past the one-month mark, you could end up draining your emergency fund faster than anticipated. According to the U.S. Department of Labor, the number of long-term unemployed workers (i.e. people who’ve been out of work for at least 27 weeks) held steady at 1.5 million as of December 2017. This makes up 22.9 percent of the unemployed.
If you find yourself in this boat, you’ll need to go beyond cutting cable and scaling back your entertainment budget to make ends meet.

“Can you call your student loan servicer and defer your loans for a few months?” suggested Game. “Remember, you’ll still be accruing interest when you do this, but it might help you out for a few months.”

Looking for other high-impact ways to free up cash? Game also suggests considering:

  • Taking on a roommate or renting out a room on Airbnb.
  • Getting a part-time job.
  • Taking out a short-term loan from a family member.
  • Using balance transfer offers to lower your credit card interest rates by moving debt to a 0% APR card.
  • Researching a personal loan. Going into debt is never advised, but if your situation’s getting dire, it may be your best worst option (It’s sure better than getting evicted or defaulting on your car payment).

This is precisely why Game says it’s so important to get your financial house in order while your career is going well. Flash forward to being laid off: Having a solid credit score is what’s going to enable you to get the best rate on a personal loan. The same goes for locking down a low-interest credit card, if it comes to that.

4 tips to help stretch your finances when you’re unemployed

How to apply for unemployment

Taking advantage of unemployment insurance can help stretch your savings and soften the financial blow of a layoff. Whether you qualify depends on a number of factors, one of the top ones being where you live; every state is different.

As long as you’re looking for work — and meet the qualifying criteria below — most states allow participants to collect benefits for up to 26 weeks (about six months). Just keep in mind that a severance package could impact how much you qualify for, depending on the state you live in.

  • Losing your job was out of your control: Being laid off generally ticks this box, but if you were fired or quit voluntarily, you’ll be ineligible.
  • You worked long enough and earned enough wages to qualify in your state: Every state’s threshold is different, but applicants must meet requirements for wages earned or time worked during an established time period in order to collect unemployment. You can research your state’s rules here.
  • You were laid off from a W2 job: In other words, you weren’t a freelancer or independent contractor. Since employers don’t pay unemployment taxes for these folks, benefits are typically off the table.

That said, there isn’t a one-size-fits-all answer when it comes to how much money you’ll actually get. What you were earning, where you live, and whether or not you received a severance package may all come into play. Your best bet is to contact your state unemployment office to start untangling the details.

How to apply for food stamps

Applying for the Supplemental Nutrition Assistance Program (SNAP), aka food stamps, is also a state-specific process. In order to qualify, you must meet resource and income requirements (SNAP provides this handy pre-screening eligibility tool to help clarify whether or not you qualify). Eligibility varies from state to state but is largely determined by your:

  • Resources: Things like bank accounts and vehicles fall into this camp. Some resources are generally off limits, like retirement plans and your home.
  • Income: You have to meet the income requirements outlined here. Some exceptions — like having an elderly or disabled person in your household, for example — may make it easier to qualify. Just keep in mind that any unemployment benefits you’re collecting will be factored in here.
  • Employment status: If you’ve been recently laid off, this one’s a biggie since SNAP eligibility is hinged, in part, on meeting work requirements. They include:
    • Registering for work
    • Not voluntarily quitting a job or reducing your hours
    • Taking a job if one is offered
    • Participating in your state’s employment training programs
    • If you’re an able-bodied adult without kids, you’ll also be required to either work or participate in a work program for a minimum of 20 hours per week to receive SNAP benefits for longer than three months in a 36-month period.

Ready to apply? Find your state here to get the ball rolling.

How to get help with a job search

There are a number of federal government programs in place to help see you through a stint of unemployment. CareerOneStop (backed by the U.S. Department of Labor) is packed with free job search assistance and training resources. Here you’ll find everything from job openings and resume guides to salary data and interview and negotiation tips.

COBRA might also make sense for newly unemployed folks. The program allows you to keep your employer-sponsored health plan after getting laid off. Before pulling the trigger on enrolling in a new health plan, be sure to check if COBRA makes sense for your health care needs and budget.

Pick up part-time work

Another way to unlock cash is to think of out-of-the-box ways to make money. Before Catala secured a new full-time job, he picked up a ton of side hustles to fill in the missing income. This included everything from tutoring at a local community college to cutting lawns to booking music gigs (He happens to be a pianist.). The takeaway? Look beyond your 9-to-5 skill set to pay your bills.

“At one point, I was doing like five different things and just making money,” said Catala, who earned too much from the gigs to collect unemployment.

“If you’re creative and willing to hustle, you’ll be fine. Even if it’s just $50 a week, that’s better than nothing.”

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Life Events, Mortgage

What is Mortgage Amortization?

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The difference between your home’s value and how much you owe on your mortgage is your home equity. With each mortgage payment you make, mortgage amortization — or paying down the loan in installments — is at play, and each monthly payment brings you closer to owning your home outright.

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What is mortgage amortization?

Mortgage amortization is the process of paying off your loan balance in equal installments of principal and interest for a set time period. The interest you pay is tied to the balance of your loan (your principal) and the mortgage rate. When you first start making payments, most of the payment is applied to the interest rather than the principal.

Your principal payments catch up with interest over time until your loan is paid off. Once it reaches a zero balance, it becomes a “fully amortized loan.”

How mortgage amortization works

The easiest way to understand mortgage amortization is to look at how monthly mortgage payments are applied to the principal and interest on an amortization table. There are two calculations that occur every month.

  1. The first calculation measures how much interest is paid based on the rate you agreed to. The interest charge is recalculated each month as you pay down the balance, and you pay less interest over time.
  2. The second calculation reflects how much of the principal you pay. As the loan balance shrinks, more of your monthly payment is applied to your principal.

If you’re a math whiz, here’s the formula:

A mortgage amortization calculator does the heavy lifting for you. You can see the effects of amortization on a 30-year fixed loan amount of $200,000 at a rate of 4.375% below.

In the first year, you pay more than twice as much toward interest as you do toward the principal. However, the balance slowly drops with each additional payment. By the 15th year, principal payments outpace interest and equity starts building at a much faster pace.

How mortgage amortization can help with financial planning

A mortgage amortization table helps you assess the short- and long-term benefits of adjusting your mortgage payments. Making extra payments over the life of the loan or refinancing to a lower interest rate or term could save you thousands in interest charges over the life loan. Even better: you’ll end up with a mortgage free home sooner.

Using a mortgage calculator to configure a few scenarios, here are some financial goals you might be able to accomplish using mortgage amortization.

Calculate how much money you can save by refinancing

If mortgage rates have dropped since you bought your home, consider refinancing. If you’re in your forever home and don’t plan to move for a while, a half-percentage point drop in rates could make room in your budget to boost retirement savings, your emergency fund or put money toward other long-term financial goals.

The example below shows the monthly payment and lifetime interest savings if you replaced a 30-year, fixed-rate loan for $200,000 at 4% with a new loan with a 3.5% interest rate with the same terms.

While saving $56.74 per month on payments doesn’t seem like much, it adds up to $20,426.83 in interest savings over the loan’s lifetime.

See the effect of making extra payments

The amount of interest you pay every month is directly connected to your loan balance. Even a small amount added to the principal each month reduces interest over time. The graphic below shows how much you’d save adding an extra $50 every month to your payment on a $200,000, 30-year fixed loan with an interest rate of 4.375%.

Figure out when you can get rid of PMI

Borrowers who don’t make a 20% down payment on a conventional mortgage typically pay for private mortgage insurance (PMI). The coverage protects a lender against financial losses if you don’t repay the loan.

Once your loan-to-value ratio, or the loan balance in relation to the home’s value, reaches 78%, PMI automatically drops off. Multiply the price you paid for your home by 0.78 to determine where your loan balance would need to be for PMI to be canceled. Locate that balance on your loan payment schedule for a rough idea of the month and year PMI will end.

Decide if it’s time to refinance an adjustable-rate mortgage

Adjustable-rate mortgages (ARMs) are a helpful tool to save money on monthly mortgage payments. However, ARMs make more sense if you plan to refinance the loan or sell your home before the initial fixed-rate period ends and the loan resets to a variable interest rate.

An adjustable-rate mortgage amortization schedule helps you pinpoint when the loan will reset and gives you an idea of the worst-case scenario on payments. If the adjustments are outside of your comfort zone, consider refinancing your ARM into a fixed-rate mortgage.

The difference between a 15-year fixed and 30-year fixed payment schedule

Refinancing to a shorter term, such as a 15-year fixed mortgage, may save you hundreds of thousands of dollars over the life of a loan — but the trade-off is a higher monthly payment.

The graphs below show the difference between a 30-year amortization schedule for a $200,000, fixed-rate loan at 4.375% and a 15-year amortization schedule for the same loan amount at 3.875%.

The lifetime interest savings for a shorter loan payment schedule is $95,447.16. As long as the $468.31 increase in your mortgage payment doesn’t prevent you from meeting other savings or investment goals, the long-term savings are worth it.

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Life Events

When Do You Need to Start Taking Required Minimum Distributions (RMDs)?

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When you reach age 72, the government requires you to begin withdrawing money from your retirement savings accounts each year. This sum, known as a required minimum distribution (RMD), allows the IRS to begin collecting income tax on the dollars you’ve stashed away in tax-deferred accounts such as a 401(k) or traditional individual retirement account (IRA).

What is a required minimum distribution (RMD)?

Regulations governing most retirement accounts state that you cannot leave funds in the account indefinitely. Even if you don’t need the money, the government requires you to begin reducing the overall balance in most accounts by a set sum each year — the required minimum distribution — once you’ve turned 72.

The precise amount of each person’s required minimum distribution is determined by the IRS based on life expectancy and total savings. The RMD rule only applies to tax-deferred accounts or accounts that allow people to reduce their taxable gross income each year by the amount they set aside in the plan.

Because tax-deferred accounts provide upfront tax savings, the IRS waits to collect taxes on contributions to the accounts and any subsequent investment gains until the money is withdrawn. Here’s a full list of retirement accounts subject to the RMD rule:

  • 403(b)
  • 457(b)
  • Profit-sharing plans
  • Other defined contribution plans

RMDs are not required for Roth IRAs or Roth 401(k)s, since contributions to Roth accounts are made using money on which you’ve already paid income tax. Note, however, that beneficiaries who inherit Roth IRAs must take RMDs.

When do I have to start taking RMDs?

You need to start taking required minimum distributions by April 1 of the year after you turn 72. In subsequent years, you need to take RMDs by December 31st.

If you are still working at age 72 and have a traditional 401(k) or 403(b) account with your current employer, you may not have to take an RMD from that account unless you own 5% or more of the company. Review your plan’s exact terms to see if it allows you to wait until you actually retire to begin taking RMDs or if it follows the same 72 rule regardless of retirement status.

Employment, however, won’t help you delay taking RMDs from any individual retirement accounts outside of your employer retirement account, such as a traditional IRA.

You do not have to take your RMD as one lump-sum payment. The IRS allows you to take out the funds in chunks throughout the year too. As long as the total meets the RMD for the year, you’re in the clear.

You’re also not limited to taking only the RMD amount from your account each year — you can withdraw more than that threshold, if you want.

How do I calculate my required minimum distribution?

Just like filing your taxes, it falls on your shoulders to remember to take the RMD once you reach 72. You can do the math yourself (we’ll explain below) to figure out what your required minimum distribution will be, or you can ask for help from a tax professional or financial adviser.

To calculate your RMD, you need to know exactly how much you have saved in your retirement account as of Dec. 31 of the previous year. Next, use the table below (the IRS’s Uniform Lifetime Table) to find your “distribution period” score, which is based on your life expectancy.

To calculate the RMD, divide your retirement account balance by the distribution period that corresponds with your age. Repeat this step for each of your accounts to come up with the total amount you must withdrawal for the year. Remember, your account balances change over time and the IRS can update its distribution period figures, so redoing this math each year is crucial to ensure you take out the correct sum.

Let’s say you turned 72 in December 2020 and had a balance of $1 million in your retirement account as of Dec. 31. You would then find the distribution period that corresponds to your age in the Uniform Lifetime Table.

According to the table, your distribution period number is 27.4. When you divide $1 million by 27.4, you get an RMD of $36,496.35. That is the minimum withdrawal you must make from that account by April 1, 2021.

However, if you’re married and your spouse is 10 years or more younger than you and is the sole beneficiary of the retirement account, you will need to find your “distribution period” score on this alternate table by locating the spot where your age and your spouse’s age intersects.

For instance, if you turned 72 in 2020 and had that same $1 million balance in your retirement account on Dec. 31, but were married to a spouse who’d just celebrated their 59 birthday, your distribution period number wouldn’t be 27.4, but rather 28.1 to accommodate the longer expected lifeline of your spouse.

And this would mean you’d need to take an RMD of $35,587.19 from your account in 2021, or about $909.16 less than you would if you were single or married to a spouse closer to your own age.

What is the required minimum distribution penalty?

If you don’t take your first RMD by April 1 of the year after you turn 72 or your subsequent annual RMDs by Dec. 31 each year, you’ll be slapped with a 50% excise tax on the amount that was not distributed when you file taxes.

That’s a steep fine when you consider that the top tax rate is 37%, which is why it is so important to accurately calculate your RMDs each year, as the tax applies whether you fail to take any money from the account or simply don’t take enough.

For example, if your RMD was $10,000, but you only took out $5,000, you will be assessed that 50% tax on the $5,000 that you did not withdraw.

Remember, if you delay taking your first RMD until April of the year following your 72nd birthday, you’ll be required to take two withdrawals in the same year, one for your 71st year and one for your 72nd year, which could raise your gross income and move you into a higher tax bracket. To avoid this, you can opt to make your first withdrawal by Dec. 31 of the year you turn 71, instead of waiting till the following April.

Alternatively, you could reduce your taxable income by making a qualified charitable distribution paid directly from the IRA to a qualified public charity, not a private foundation or donor-advised fund. The charitable distribution can satisfy all or part of the amount you are required to take from you IRA and won’t count as part of your income.

If you withdrawal the RMD first, then donate it, this trick won’t work as the money will count toward your gross income.

What if I have multiple retirement accounts?

If you have more than one retirement account, things can get a little more complicated. You still need to take an RMD, but you don’t have to take one out of each IRA account. Instead, you can total the RMD amounts for all your IRAs and withdraw the whole amount from a single IRA or a portion from two or more.

However, you can’t do the same with most defined contribution plans, like 401(k)s. With these accounts, you must take an RMD from each plan separately. One exception to this rule, though, is 403(b) tax-sheltered annuity accounts. If you have multiple of these accounts, you can total the RMDs and withdrawal from a single account.

If you own several different kinds of retirement accounts with RMDs, it’s probably a good idea to seek advice from a tax or financial adviser professional who can help you make the wisest decision for your finances.

I inherited a traditional IRA — what should I do?

While it’s great to be left the generous gift of a retirement account by a loved one, inheriting an IRA comes with its own set of tricky RMD rules that can vary greatly depending on your relationship with the original owner and how you chose to use the account.

I inherited a traditional IRA from my spouse

If you’re a spouse and sole beneficiary, you have the most flexibility in how to handle your new IRA. You can choose to treat the IRA as your own by designating yourself the account owner and making contributions or by rolling it over into an existing IRA account that you own. If you choose this option, you can follow the standard RMD rules — meaning you can wait until you turn 70½ to begin taking money from the account.

Alternatively, you can roll the assets into what’s known as an inherited IRA. With this kind of account you can start taking distributions immediately and not face the typical 10% early-withdrawal penalty the IRS applies if you’re under age 59½.

To calculate the RMD you’ll need to take with this kind of IRA, use the IRS’s Single Life Expectancy Table, which has different distribution period figures than the standard table you would use if you were the original account owner. You can opt to use your own age for these calculations or your partner’s age as of their birthday in the year they died, reducing life expectancy by 1 each subsequent year.

But you may not need to take RMDs right away depending on how old your spouse was when they died. If they were older than 70½ then you’ll need to start withdrawing funds by Dec. 31 of the year following their death. But if they were younger, the IRS lets you leave the money in the account until your spouse would have reached 70½.

I inherited a traditional IRA — but I’m not a spouse

Beneficiaries who are not a spouse are required to move the assets into an inherited IRA and begin taking RMDs regardless of the original owner’s age. If the person passed before age 70½ you can opt to withdraw the full balance within the five years following the year of their death. Or you can prolong the payouts by taking RMDs annually based on your age, reducing beginning life expectancy by 1 for each subsequent year, using the Single Life Expectancy Table.

If the original owner was 70½ or older, how you calculate your RMDs depends on whether you or the deceased was younger. The lowest age is what you’ll base your life expectancy figure found in the Single Life Expectancy Table on, though you will need to reduce beginning life expectancy by 1 every subsequent year.

I inherited a Roth IRA — what should I do?

The original owner of a Roth IRA never has to take RMDs but that can change when the account passes to a beneficiary. A surviving spouse who inherits a Roth IRA can opt to treat the account as their own, meaning they won’t ever need to take an RMD, if they contribute to the account or roll into an existing Roth IRA.

Non-spouse beneficiaries, however, do have to take RMDs from an inherited Roth IRA, following the same rules as those who inherit traditional IRAs where the owner passed before reaching age 70½.

That means these beneficiaries can either withdraw the entire balance from the Roth IRA within the five years following the year of the original owner’s death or begin taking RMDs based on your life expectancy, as outlined in the Single Life Expectancy Table, by the end of the year following the owner’s death.

The final word on required minimum distributions

Whether the retirement account was yours to begin with or you’ve inherited it, calculating the correct RMD amount to withdraw from it every year can be tricky, but spending the extra time to make sure you understand the rules and check your math can pay off big time when you’re not losing 50% of your savings to Uncle Sam in the form of a tax penalty.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.