Penalty-Free IRA withdrawals

[swsop]

From Retirement & Financial Planning Report

Usually, IRA withdrawals before age 59 1/2 are subject to a
10 percent penalty tax in addition to regular income tax.
However, the tax code contains a specific exemption for
"substantially equal periodic payments." If you take your
money out on a regular schedule for at least five years or
until you're 59 1/2, whichever comes later, you won't owe
the 10 percent penalty.

Once you start on this program you can't stop, except in
cases of death or disability. Moreover, you may have to
file an extra form to let the IRS know why no penalty tax
is due.

If you're interested, contact your IRA custodian and ask about
your options. There are three ways to take money out,
involving different ways of calculating life expectancy.
Generally, these tables can be manipulated to take out just
about any amount you wish, without the 10 percent penalty.


swsop

[Wheels]

swsop wrote:

different ways of calculating life expectancy.
Generally, these tables can be manipulated to take out just
about any amount you wish, without the 10 percent penalty.

This is why TSP will allow you to withdraw your money in substantially equal payments based on the IRS life expectancy tables. However, I don't believe there is a lot of manipulating you can do. They do the calculation, not you. I've always used 3% as a rule of thumb. If you start withdrawals at say age 50, your life expectancy is about 83 or 84 (can't remember exactly because I haven't looked at the chart in so long, but this is close)so you will be allowed to take 1/33rd (83-50) of your account balance in the 1st year. They will re set your monthly amount each January. For at leastthe first few years the amount should go up. That is because your account balance should rise (because you are only taking out about 3% and hopefully you are making at least 5 or 6%) and because your life expectancy will gradually get shorter (it moves on a sliding scale - the life expectancy age will go up one year for every 2 or 3 years older you get). Eventually this will be moot because once you turn 59 1/2, and you've been doing this for 5 years, you can stop and change your withdrawal to a fixed amount per month and still avoid the penalty.

There - did that muddy it up enough

Dave

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[Locke]

I hope this is helpful....

Eight Ways to Avoid the 10% Early Withdrawal Fee on Your IRA
From Joshua Kennon


1. Permanent disability of IRA owner
Money can be withdrawn without penalty in the event the IRA holder becomes permanently disabled.

2. Death of IRA owner
It's small consolation, but if you kick-the-bucket before you're 59 1/2 years old, your estate won't be hit with the 10% early withdrawal fee.

3. Withdrawals are used to pay non-reimbursed medical expenses
In the event of serious illness or injury that requires prolonged or expensive medical treatment, Uncle Sam will waive the early withdrawal fee on the condition that the expenses are in excess of 7.5% of your adjusted gross income.

4. Withdrawals used to help pay for first-time home purchase
Despite a lifetime limit of $10,000, this exemption can make it much easier for an IRA owner to buy a house.

5. Higher education costs
College can be expensive. Thankfully, certain higher education costs for you, your spouse, children or grandchildren can be withdrawn penalty-free. You may still owe federal income tax, however. For more information, read the Internal Revenue Service article, Notice 97-60 Using IRA Withdrawals To Pay Higher Education Expenses.

6. Money is used to pay back taxes to the IRS after a levy has been placed against the IRA
This is not the kind of exemption for which you want to qualify, but it may save you money if you find yourself in an uncomfortable position with the IRS.

7. Withdrawals used to pay medical insurance premiums
Out of a job? The rest of the world may be topsy-turvy, but rest assured, you won't be penalized for using retirement money to pay your medical insurance as long as you have been on unemployment for longer than twelve weeks.

8. Made on or after the day the IRA owner turns 59 1/2
Once you have reached the qualifying age of 59 1/2, you can make penalty-free regular withdrawals upon which to live.

A Caveat
There is one catch to these qualifying exemptions; the holder of an IRA is subject to a five year waiting period (measured in tax, not calendar, years). An investor could not, for example, deposit $3,000 in their IRA this year and withdrawal it next year penalty-free even if it would otherwise qualify as an exemption.

[Wheels]

I hope this is helpful....

Eight Ways to Avoid the 10% Early Withdrawal Fee on Your IRA
From Joshua Kennon...

5. Higher education costs
College can be expensive. Thankfully, certain higher education costs for you, your spouse, children or grandchildren can be withdrawn penalty-free. You may still owe federal income tax, however. For more information, read the Internal Revenue Service article, Notice 97-60 Using IRA Withdrawals To Pay Higher Education Expenses.



This is one that I was not aware of. Thanks for the tip.

[azanon]

I hope this is helpful....

Eight Ways to Avoid the 10% Early Withdrawal Fee on Your IRA
From Joshua Kennon

I hope you found that on a dated site Locke. Joshua talks about IRAs as if there's only one kind and/or as if they both have the same rules for avoiding that fee.

With a Roth IRA you can take out contributions at any time, and for any reason without penality. With a traditional, you cannot.

[DenverAce]

For most of us, or a lot of us, our IRA is held by the Thrift Savings Board, correct? Only the wise and informed among us (not me) realized we would also need a Roth type account in order to withdraw and spend penalty free prior to age 59 ½, for the "early retirement." If one retires prior to age 55, you pay the early withdrawal penalty. I am Law enforcement, retiring at age 50, so this is "quite" significant.

So in comes provision 72T of the IRS Code. Airline pilots, who are often forced to "retire early," were successful in lobbying for this provision. 72T is the Substantially Equal Periodic Payments (SEPP) mentioned above.

My main point here is this, I was amazed (disappointed) to find out that the TSP will only use one of the three IRS approved methods to calculate your SEPPs. They of course use the most conservative method which "protects" you. But the one method they use requires a lot more of your money, to do the same thing a privately held IRA can do.

For me to take $500 per month in SEPPs requires that I leave $200,000 in the TSP. I can get the same $500 per month by only leaving $100,000 in another IRA.

So I think the idea for me is to transfer out of TSP to multiple IRAs and make my SEPPs from only one of the IRAs.

The TSP only uses the Minimum Distribution Method of calculating the payments. The other two IRS approved methods are an amortized and an annuitized method.

Any corrections, suggestions, additions, etc. would be welcomed here

gc