September 2009
Dear Friends of Our Firm,
Normally, it is not advisable to take withdrawals from your qualified retirement plans and IRAs prior to age 59 1/2. Not only does this erode your nest egg, you're generally hit with a 10% penalty tax on top of regular income tax.
However, you may be facing a cash crunch during this recession with no place else to turn. In that case, you can minimize the damage if you qualify under one of several tax-law exceptions. Here are five prime examples.
- No penalty assessed will be assessed if you arrange to receive “substantially equal periodic payments” (SEPPs) from a qualified plan or IRA based on your life expectancy or the joint life expectancies of you and a designated beneficiary. The payments must last for the longer of five years or until you reach age 59 1/2.
- If your family has been hit with some unexpected medical bills, you can tap into your plan or IRA to pay for medical expenses. The withdrawals are exempt from the penalty to the extent that the cost qualifies for the medical expense deduction (i.e., unreimbursed medical expenses above 7.5% of your adjusted gross income).
- The tax law includes a special tax break for "first-time homebuyers." You don't have to pay the penalty on pre-age 59 1/2 withdrawals if you take money out of an IRA to buy or build a qualified home. Similarly, you might use IRA funds to help your child buy a home. Caution: There’s a lifetime dollar cap of $10,000 on this exception.
- Distributions from an IRA made before age 59 1/2 won’t trigger the penalty if the funds are used to pay for a child's qualified higher education expenses. This includes tuition, books, supplies, etc. -- even room and board if your child is a full-time student.
- If IRA funds are used to continue health insurance coverage under COBRA, early withdrawals are exempt from the penalty. In a new field advice memo, the IRS says self- employed individuals are also exempt if they can show they would have received unemployment benefits for 12 weeks if they were an employee.
Everyone's situation is different. We can analyze whether you should take an early withdrawal or utilize other resources. Early retirement plan withdrawals should be viewed as a last resort. Call us at 262-754-4300 to arrange a consultation.
