Part of my plan for retiring early is to keep my income very low so that I remain in the 0% tax bracket. According to the IRS I can earn the following before being bumped to the 10% federal and 4.5% state tax brackets.

$3650.00 - exemptions
$5700.00 - standard deductions
$ 500.00 - if I pay property taxes and don't itemize
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$9850.00 - 0% tax bracket
$2000.00 - if I fund an HSA
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11850.00
+ if I have more than 5700 in standard deductions I could earn even more and remain in the 0% bracket. These are 2009 figures and it may go up some in 2010.

In 1997 I started working for a big company which had a pension plan for it's employees. They froze the plan one year after I started working there. When I retired the company gave me the money that was in the plan. It had grown to a whopping $3906.00. In this situation the pension is treated like an IRA. The fund reserved 20% to pay taxes before passing the money on to me.

If I just spent the money on living expenses I would pay taxes on the money as income and also owe a 10% penalty for early withdrawl. However, if my income with the pension/IRA dispersal is less than the amount to tip into the 10% tax bracket I owe no income taxes on the money.

If I spend the pension/IRA money on medical expenses, including health insurance premiums, dr visits, prescription drugs, lab work, eye glasses etc, I don't have to pay the 10% penalty. There is a caveat on that. You can exclude the amount you paid for unreimbursed medical expenses during the year minus 7.5% or your adjusted gross income for the year. And the IRA/Pension distribution contributes to your gross income. Figuring out the exact amount to withdrawl ahead of time can be tricky unless you know exactly how much you are going to earn for the year and exactly how much your medical expenses will be. I plan to ballpark it in the future and if necessary pay a small 10% penalty on the extra.

So for 2009 I had income including the pension distribution of 7765. My medical expenses were 3140 multiplied by 7.5% means 2558 was exempt from the 10% penalty. That left 1348 to pay the penalty on so I paid $135 in taxes last year and got the rest of my 20% that the fund withheld back as a rebate. To do this you have to fill out form 5329 and select exemption 05. There are only 4 lines on the form so it's not that difficult, plus you don't have to itemize your deductions to do this, you can use the standard deduction, but you do have to have reciepts to back up your claim on how much you spent on medical if the IRS ever asks thru a random audit.

This year I will be withdrawing $5000 from my IRA to pay for medical expenses. This is a ball park figure based on needing to pay $4500 for health insurance and a guesstimate of another $1000 - $1500 in out pocket expenses. My income can be higher since I can open an HSA fund so I shouldn't have to pay income taxes on the withdrawl and the penalty may be anywhere between 0 and less than a $100.

I could take the money from some other funds and not use my IRAs. I know the money gurus always tell you to leave this money till the last, but I have good reasons for doing it this way.

1. Most of my money is in IRAs.
2. Currently I'm in a 0% tax bracket, you can't get lower taxes than that. Taking the money now means less money I will be forced to take out when I am 70 and collecting social security and our government has raised taxes thru the roof to fund all the spending they are doing now.
3. It preserves my other funds, especially my cash for emergencies.

Until I am 59 1/2 and can withdrawl the money without penalty I will try to continue to use this method of funding my health care expenses. That's a little more than 10 years, this could be $50,000 or more preserved in my other funds and money that I won't have to pay taxes on, or very little taxes.

I finished reading my book Beyond the Dark. Supernatural short stories - very good.

I was watching Semi-homemade on the Food Network while I was making out my grocery list this morning. She was making a dish that I thought looked pretty good, so I added the ingredients to my grocery list.

Coleslaw, mixed with mandarin oranges, cashews and chicken tenders from the deli. I had it for supper and it was really good. I liked the oranges and coleslaw combination. I think I might try it with a leftover chicken breast instead of a chicken tender next time.

I spent $37.71 at the grocery store and will get $10 back in rebates. I saved 39% according to the receipt. That's before the rebate.

Met my parents at a new Mexican place that opened a half a block from me. It was really good. I spent $11. I walked to the restaurant but it was so cold and the wind was blowing like crazy so mom and I decided to skip our walk.

I checked my taxes again and decided all the numbers are right so put them in the envelopes ready to mail.

I started working on the rebates for my computer. Got about 6 ready to send, have 4-5 left to do. They take so long to get all the pieces together, but it's definitly worth it. The smallest rebate is for $20. One of the rebates for $150 I just had to go to the Best Buy website and type in a couple of numbers plus my personal information and it's done. That's the way to go, I wish they were all like that.

I finished reading my book, Lara Croft Tomb Raider. Sci/Fi. Very good. Much better than the movie, but I almost always like books better than a movie, they explain so much more.

walked with mom for 55 min

Spent about 4 hours on my taxes. It was pretty easy using the TaxCut software except for the stock option part. It took me almost 2 hours to figure out the values and how to record them. I had to go back and find old emails about purchase price and market price and selling price, etc, etc...

I also spent some time on the IRS website looking for examples on how to report this. I found them and then just had to do the math. Hope I did everything right. I'm going to look at the numbers again tomorrow to make sure I entered everything correctly. Need to do that when I'm a little clearer-headed and haven't been looking at numbers all day.

If I did it right I will get $424 back from federal and owe state $51. I'm happy with that. I'll send the federal off on Monday and then wait awhile to send the state.

Finished reading the library book All Night Long by Jayne Ann Krentz. Romance. Very good.