Reach IRA Funds Early

Suppose you’re only age 55, but you’d like to start taking some money out of your IRA.  Is there any way to do so without being penalized?

Normally you can’t withdraw IRA funds before age 59½ without incurring a 10% penalty, with certain exceptions (rolling the funds over to another IRA, payment of medical insurance premiums by unemployed individuals, disability, qualified educational expenses and the purchase of a first home up to $10,000).  But the tax code also allows you to make periodic withdrawals, based on your life expectancy under IRS tables, without incurring the penalty.

The key requirements are that your payments must be periodic (quarterly, for example) and that they continue for at least five years.  Depending upon the withdrawal method chosen, it may be possible to build in a cost-of-living increase.  If you stop receiving payments before five years, or take out additional amounts, you will be subject to the 10% penalty on all amounts received.  Once you reach age 59½, you can stop taking distributions, provided you have met the five-year test.  It’s also possible to divide a single IRA into separate accounts and take substantially equal payments from only one account, thereby preserving more of the savings.  You will, however, owe income tax on your IRA distributions, even if you avoid the 10% penalty.  Check with your financial advisor before undertaking any withdrawals prior to age 59½.

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