By Marc H. Weiss
Archer Weiss Insurance & Financial Services, Inc.
In light of today’s fragile and unpredictable economy, many individuals are forced to look at ways to provide additional income for their families. For some, an IRA is viewed as a ready source of liquidity. However, withdrawals from tax-advantaged retirement accounts, particularly IRAs, should be discouraged because it reverses the retirement savings process.
Taking distribution too early is usually a mistake. It’s highly inefficient and expensive because it subjects your savings to both ordinary income tax and a 10% early withdrawal penalty. Combined, the tax and penalty can result in the erosion of up to half the value of your distribution!
The IRA 10% Early Withdrawal Penalty
Generally, the 10% penalty applies to the taxable portion of withdrawals made from traditional IRAs by account owners who have not yet reached age 59 ½. This penalty also applies to Roth IRA withdrawals in certain circumstances.
It’s better to take necessary cash from a non-taxable account, if available. If not, even a home equity loan would be better. The loan proceeds would be tax-free and the interest on the home equity loan may be tax deductible.
How to Avoid the Early Withdrawal Penalty
In the real world many people do need to access their retirement funds earlier than originally planned. While income tax cannot be avoided on early distributions, in some cases the 10% penalty can be.
Several exceptions are available under the tax code to help an IRA owner avoid the penalty. Below are a few notable ones.
Early IRA Withdrawal Exceptions:
- Disability
- Medical expenses
- Health insurance — if you are unemployed
- Higher education expenses
- First-time home buyers
- IRS levy
- Substantially Equal Periodic Payments; or SEPP (“72(t)” payments)
- Military reservists called to active duty after September 11, 2001
- Death
Limitations to IRA Penalty Exceptions
Many penalty exceptions have limitations. For example, the first-time homebuyer exception is capped at a maximum lifetime limit of $10,000 per IRA owner.
To meet the disability exception, the degree of debilitation must go far beyond having a broken leg or near fatal head cold. Your physical or mental disability must be serious enough that it precludes you from engaging in any gainful economic activity. Also, a physician must determine that the disability will result in your death or be of a long, continued and indefinite duration. (Certainly, this is one exception you don’t want to qualify for.)
To raise money or pay off debt, look outside your IRA.
If you must turn to your IRA, try to use one of the exceptions listed above, if at all possible, to avoid the 10% early withdrawal penalty.
About Marc Weiss
Archer Weiss Insurance and Financial Services
(818) 610-8560
Marc’s career spans over 30 years, specializing in retirement planning for retirees, business owners, television and motion picture personalities and healthcare professionals. His expertise includes investments, distribution planning, legacy transfer strategies, financial planning and insurance programs. Marc has also been featured on The Business Channel.
Filed under: Financial Planning, Investment, Retirement Planning Tagged: Archer Weiss, early withdrawal, investment, IRA penalty, Los Angeles, Marc Weiss, retirement planning, Roth IRA, Woodland Hills
