Early Withdrawal IRA Rules for Senior Citizens

June 6th, 2008  |  Published in Disbursements  |  Comments Off on Early Withdrawal IRA Rules for Senior Citizens

I had a reader Wallace send in this question:

What is the law regarding premature IRA CD withdrawals by senior citizens without penalty?

The law regarding premature IRA withdrawals depends on the type of IRA you have. If you have a Roth IRA, you can withdraw your principal without penalty as long as it’s been in the account for five years.

If it’s a Traditional IRA, you pay a 10% penalty in addition to your marginal tax rate if you are under the age of 59 1/2.

There are a few exceptions to the 10% early withdrawal penalty that may apply to your situation:

  • You are permanently or totally disabled,
  • You are unemployed and are paying for health insurance premiums,
  • You are paying for college expenses for yourself or a dependent,
  • You are paying for medical expenses exceeding 7.5% of your AGI,
  • Or the IRS has levied your retirement assets to pay off your tax debt.

If you fit any of those categories, you avoid the 10% penalty but you still have to pay your income tax on those funds.

Please consult with a tax professional before making any decisions, rules are constantly changing and this information may be out of date.

Fidelity, Vanguard Easily Manage Required Minimum Distributions

August 25th, 2007  |  Published in Disbursements, IRA  |  2 Comments

After writing the article on required minimum distributions, I checked with some popular retirement brokerages and saw that many of them handle required minimum distributions quite gracefully.

At Vanguard, they will:

* Calculate your RMD. Each January, we’ll notify you by mail of the amount you must distribute by year-end.
* Distribute your RMD, if you wish. We can automatically transfer your money to a Vanguard® nonretirement account or deposit it at your bank.
* Keep you posted. You’ll receive statements by mail, and you can track your progress online at any time.

Fidelity (a PDF about their “Personal Withdrawal Service”) also offers similar services but it’s a little harder to get at since it’s written into a PDF document and not with high level bullet points like Vanguard’s.

RMDs are a very well understood item in retirement when it comes to IRAs so if your current brokerage doesn’t handle it, I’d recommend finding another one.

4% Retirement Withdrawal Rule

March 7th, 2007  |  Published in Disbursements  |  2 Comments

In yet another one of Walter Updegrave’s retirement columns, I was introduced to the 4% withdrawal rule for your 401K. Basically, the rule is based on running Monte Carlo simulations (computer simulations of the probabilities dealing with the markets) where if you withdraw only 4% of your retirement assets each year, there is an 80% chance that your funds, regardless of how well or how badly the markets perform, will last thirty years. Obviously, as you increase how much you withdraw, that probability goes down.

Now, Walter does make an excellent point in that 4% isn’t a hard and fast rule because it doesn’t keep up with inflation. At 3% a year, that really starts eating into your fixed income unless you adjust your withdrawals to match inflation. For example, if you have $1M in assets, 4% is $40,000 a year. In ten years, in order to have $40,000 in purchasing power in today dollars, you will have to have closer to $54,000 in funds if inflation were to grow at 3% a year. So, to combat that you will want to increase your disbursements to at least match inflation.

Also, you will want to enjoy your retirement so don’t feel as though you’re forced to that 4% rule. If you spend more now and spend less later, as long as it evens out you should be okay.

Withdraw From Tax Deferred Accounts Last

January 2nd, 2007  |  Published in 401K, Disbursements, IRA, Roth IRA  |  Comments Off on Withdraw From Tax Deferred Accounts Last

When it comes time to begin taking disbursements from your retirement accounts, try to take them from your tax deferred or tax free accounts last (401k’s, Roth and Traditional IRAs) because you want them to grow tax-free as long as possible. If you opt to retire before 70.5, the age at which mandatory disbursements begin, try to use the funds you have saved up or invested outside of those retirement accounts first. Taxed funds always grow slower because there simply is less of it around to grow with.

For example, if you have a brokerage account that you use to invest in the stock market and you retire in your sixties, you’ll want to tap that account before your 401k, Roth, or Traditional IRAs. With each disbursement from the 401k and Traditional IRAs, you will have them be taxed as ordinary income and you’ll also be reducing their balances so they won’t grow as quickly. With the Roth, you won’t pay any income taxes on your disbursements but you also won’t get tax free earnings either. So, in both cases, you’ll want to spend what you have outside of tax protected accounts first.

Name Your IRA Beneficiary

December 28th, 2006  |  Published in 401K, Disbursements, IRA  |  5 Comments

It is critically important that you properly name your IRA beneficiary because, in the event of your demise (which will hopefully happen very far into the future), the tax ramifications change based on who you name as your beneficiary. Usually, your spouse, if you have one, will be able to inherit your IRA without any income tax effects because you two are legally bound. Everyone else, though, is subjected to special rules.

If you die before you turn 70.5 and the person who inherits your IRA is not named the beneficiary, that person must take distributions within a year and completely empty the IRA within five years. This will probably push them into a higher tax bracket and increase the percentage of your IRA that goes to taxes and decrease the percentage your heir gets to keep. If that person is named the beneficiary, then he or she still has to take distributions with a year but then can stretch them out over their lifetime and not over five years. If you die after 70.5, your heirs must take distributions based on the projected life expectancy remaining and may be subject to an estate tax (if you have more than $2M in your estate).

(Please seek a professional before making any financially related decisions, remember I’m just an amateur)

Reasons To Take The Lump Sum

November 19th, 2006  |  Published in 401K, Disbursements, Pensions  |  Comments Off on Reasons To Take The Lump Sum

When it comes time to cash out your retirement, it usually comes down to a decision of whether you want to take a lump sum or income for life (or a mix of both). Here are some reasons why you should consider a lump sum.

1. You can control your investments

If you take the lump sum, you can turn around and invest that money on your own. You get to make the decisions and you’re in the driver’s seat, this of course could be a good or a bad thing!

2. You aren’t afraid of inflation

When you take a lump sum and are able to invest that money, you can protect yourself from inflation. When you take income for life, the income may not be adjusted for inflation (in fact, very few are) so your check loses buying power year after year.

3. Bird in the hand…
When all those airlines went bankrupt, the first to go was the pension… income for life may mean income for the rest of your life or income for the rest of your company’s life, whichever is shorter. If you company goes under, the Pension Benefit Guaranty Corporation, which insures pension plans, only pays out pennies on the dollar.