I Passed the CFP® Exam

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Last Thursday, April 24th, at about 9am, I found out that I passed the March 2014 CFP® Exam.  I’ve never worked so hard for anything in my life so the fact that my dream is now a reality is still a bit surreal.  I plan on writing about the entire experience one day (what it was like studying for the exam, taking the exam and getting my results).  But for now, I just want to enjoy the moment and soak it all in.  My colleague who passed the exam several years ago said that after a week or two, I’ll “come back to earth.”  Since I know this high won’t last forever (it never does, does it?), I want to milk every minute that I’m still on cloud nine.

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Community Property

California is a community property state.

Community property means any property (including income and debt) acquired by one spouse is considered equally owned by both spouses even if only one spouse’s name is on the official title.  For instance, if husband and wife buy a house and husband pays for 100% of it and only his name is on the title, the property is still considered 50% owned by the wife because it was bought after they got married.  This comes as a huge surprise to my newly married friends who thought they were keeping their money separate by maintaining separate accounts.

A few exceptions to this are what’s called Separate Property.  Separate Property is property acquired by either spouse before marriage or by gift or inheritance during the marriage.  So if husband bought a house before he got married, that is considered Separate Property and wife does not own any of it.  And if husband’s mom decides to gift him a new car, the wife, again, does not own any of it regardless if it was given to him before or after marriage.  And if husband’s mom passes away and he gets an inheritance, the wife does not own any of that either.  The exception to this exception is if you put money you made after marriage into theses accounts.  So if husband bought a house before marriage (Separate Property) but used money he made after marriage to pay the mortgage, it will most likely end up being Community Property.

Using Money in Your Roth IRA

The rules for using money in your Roth IRA share a lot of similarities to the rules and exceptions for using money in your Traditional IRASee here for the full list of when you can use your Roth IRA without paying a 10% penalty.  One difference, however, is that your Roth IRA has to be opened for at least 5 years before you start taking money out.  Even if you meet one of the other requirements (like reaching age 59.5), if your Roth IRA hasn’t been opened for at least 5 years, you will still be subject to the 10% penalty.

However, there are 2 advantages to taking money out of a Roth IRA vs. a Traditional IRA:

  1. When you take money out and it’s a qualified distribution, you don’t have to pay any tax because you already paid tax when you put money into the account.
  2. Even when it’s a non-qualified distribution, you don’t have to pay the 10% penalty on your contributions.  You just have to pay the penalty on the interest earned in the account.  Here is an example I gave my friend:
    • Let’s say you put in $5,000 into your Roth IRA 7 years ago and your account grew to $8,000 because of your investment returns.  You can take out $5,000 anytime without paying tax or penalty because that is your contribution amount.  But if you take out $8,000, you have to pay a penalty (and tax!) on the $3,000 worth of earnings.

Using Money in Your Traditional IRA

Most people know that IRAs are used for retirement.  But what is considered “retirement” and what happens if you use the money before then?  The rules are a little different for Traditional IRAs and Roth IRAs so today I will only cover Traditional IRAs for the sake of brevity.

“Retirement” for IRA purposes is age 59.5.  Once you reach age 59.5, you can start taking money out of your IRA without penalty.  But don’t forget, you’ll still have to pay taxes on whatever amount you take out because Traditional IRAs are typically funded with pre-tax money (income you have not paid taxes on yet).  If you take money out of your IRA before age 59.5, you will have to pay a 10% penalty on the amount you take out (in addition to paying taxes).

Luckily, there are a few exceptions to this rule.  If you are not age 59.5 but use your Traditional IRA for things like:

  • unreimbursed medical expenses that are more than 10% of your adjusted gross income,
  • medical insurance when you’re unemployed,
  • when you are totally and permanently disabled,
  • qualified higher education expenses (i.e. grad school),
  • to buy, build, or rebuild a first home,

you will not have to pay the 10% penalty.  This is great news for those of us who are worried about not being able to use our IRAs anytime before we retire, which if you’re a millennial, probably won’t be for a long time.