 | | Smart Withdrawal Options for Your IRA:
Cashing Out | |
Your IRA is a lot like a soufflé—if you try to take a bite prematurely, you could end up with less than you had hoped. To savor the full rewards of your steady IRA contributions, you need to make withdrawal decisions wisely, and that means brushing up on all the pertinent IRS regulations.
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| When is it safe to make withdrawals? For both types of IRA—traditional and Roth—the IRS allows you to start making withdrawals at age 59 1/2, whether you're retired or not. Dip in before then and you may have to pay a 10% penalty. You'll avoid the 10% hit if the early withdrawal is used to buy a first home, pay certain health-related expenses, or prevent foreclosure on your home--what the IRS calls hardship withdrawals. (See Publication 590 for details). | |
| You can start penalty-free withdrawals as early as age 55 provided you have lost your job or taken early retirement. If you're younger than 59 1/2 and wish to retire the IRS supplies yet another option. You can set up a schedule to receive substantially equal periodic payments from your plan (also known as 72(t) distributions), based on your life expectancy. Let's say you're 49 and IRS actuarial tables predict you'll be around for another 30 years. If you choose to receive payments annually, then each one would equal one thirtieth of your current IRA assets. Once you choose this plan, you have to stick with it for at least five years or until you turn 59 1/2, whichever is longer. | |
| Beyond penalties, taxes are another consideration at withdrawal time. Here's where the Roth and traditional IRAs differ. With a traditional IRA, withdrawals are always taxable as income, regardless of penalties. This is because you've already enjoyed tax benefits by making deductible contributions. | |
| Since a Roth IRA is funded with nondeductible contributions, withdrawals here are generally not taxable. Even in the case of hardship withdrawals, you won't pay taxes as long as you've waited at least five years before raiding your Roth. | |
| With all the talk about early withdrawals, it's important to remember that late withdrawals can be a problem, too. If you have a traditional IRA, you are required to begin taking payments from your plan by age 70 1/2. Otherwise, you'll pay a hefty 50% penalty on what you should have taken out. Notably, late withdrawals aren't a problem for Roth IRA owners; they can let their money sit and grow as long as they want. | |
| That's certainly a fine option to have, especially with Americans facing longer retirements due to increasing life spans. But you shouldn't put off withdrawals indefinitely. Remember, the point of opening an IRA in the first place was to make your retirement as comfortable as possible. So consider your options, consult with your tax advisor, and when the time is right, dig in and enjoy. | |
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