We are often asked, “When is the best time to withdraw money from tax-deferred accounts?” And the answer is, the longer you leave the money alone, the more you can benefit from what Albert Einstein called the eighth wonder of the world, “Compound Interest”, meaning interest that is earned on interest. In the case of a tax-deferred account, you also earn interest on the taxes that you don’t have to pay until you use it.
However, many of you have said, “I really need the money now! But I’m not 59½. Won’t I be stuck with a 10 percent or more penalty?” Our answer is sometimes, but not always. The question below from Mary Jane will help clarify this.
Q: I am 55 years old and live on a very limited budget. Even with my job, I live very close to running a deficit each month. However, my ex-husband left me an IRA worth $127,000. I would really like to take some income from this IRA account, but I don’t want to pay the IRS penalties. Any suggestions?
Mary Jane P.,
A: Dear Mary Jane. At least ex-spouses are good for something. But forgive us we digress. Let’s discuss ways in which you can tap traditional IRA’s, like your account, before age 59½. According to the IRS publication 509, page 25:
“There are several exceptions to the age 59½ rule. Even if you receive a distribution before age 59½, you may not have to pay the 10 percent additional tax if you are in one of the following situations:
- You have unreimbursed medical expenses that are more than 7.5 percent of your adjusted gross income.
- The distributions are not more than the cost of your medical insurance.
- You are disabled.
- You are the beneficiary of a deceased IRA owner.
- You are receiving distributions in the form of an annuity.
- The distributions are not more than your qualified higher education expenses.
- You use the distributions to buy, build, or rebuild a first home.
- The distribution is due to an IRS levy of the qualified plan.”
So, there may be no relief unless you use these methods. However, there is a little-known withdrawal provision, which could be beneficial to you. It’s called a 72T withdrawal. Essentially, you must take a substantial and equal payment until you reach 59½ or five years in time, whichever is longer.
Withdrawals become mandatory and are taxed at your income rate. Each IRA is counted as a separate deal to use 72T or not to use it. In this case, you can use your $127,000 IRA to give you about $6,000 a year for the next five years. Withdrawals are subject to the early withdrawal penalty if ceased. Investors should consider the possibility of depleting their retirement account well before the end of their life expectancy.
As always, one size does not fit all and you and our other readers should consult a financial professional before making decisions. Best of luck Mary Jane. We hope this helps. Your money matters, so treat it wisely.
Dan Searles and John Stohlman, owners of Medallion Financial Group, are CFP®’s, financial planners and Registered Representatives with over 25 years of experience in the financial services industry, offering securities and advisory services through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Adviser. Medallion Financial Group and NPC are separate and unrelated companies. They manage over $250 million of client assets.
For further info, questions or comments regarding this article, Dan and John can be reached at 301-990-9704 or 1-800-878-9704 or Dan.Searles@natplan.com.
*National Planning Corporation does not endorse the opinions expressed in this column. The information here is not to be considered as financial, tax or legal advice. As with any financial, tax or legal matter, consult your qualified adviser before taking action. No investment strategy can ensure a profit or protect against a loss. As always, past performance is not indicative of future results.