It was my understanding that an early distribution from an IRA was not only taxable as income but also, with a few exceptions, subject to an additional 10% tax. Now an acquaintance tells me she read somewhere that an early distribution precipitated by job loss would not require an additional 10% tax. I cannot confirm this in any of the tax books I researched. Is this acquaintance correct? Thanks.
Sara
There are a number of exceptions, you are correct there. She may have read that job loss due to permanent disability is one such exception, and forgot to mention the disability part to you. There was a Katrina (as in the hurricane) exception as well, but that has come and gone.
Joe
She's wrong if she thinks that's all it takes. For a complete description of the penalty exceptions see the discussion beginning on page 53 of IRS Publication 590. Don't forget to keep reading through all the "ifs, ands and buts."
See
To pay for un-reimbursed medical expense over 7.5% of AGI might apply, but that's even if you're employed.
Finally, substantially equal periodic payments. You have to do it for
5 years though, so it eats up your retirement savings. Follow the link in the above webpage titled " Rules Regarding Substantially Equal Periodic Payment". The example there shows that on a 500k balance and age of 45, the annual payment would roughly be 12500 or 25000 depending on the method you choose to use.Good luck.
========================================= MODERATOR'S COMMENT: The SEPP requires five years AND until you reach age 59.5
Thank you for the responses. It sounded too good to be true. My acquaintance's source for her statement was Gail MarksJarvis' column in today's Chicago Tribune. In her answer to a reader's question about what to do, financially, when facing a job loss, she says: "You have another issue to face. If you remove money from your IRA and
401(k) now, Uncle Sam will punish you with taxes and perhaps a penalty. In some situations, such as a job loss, penalties on IRAs can be waived, but taxes aren't." Here is the link to the column if you want to see it:
No matter how bright one may be, mistakes are made. This seems to be one. This was one I happened to be sure of. But it was easy enough for Gail to check her facts, the Pub 590 Phil references. I went to your link and saw a note on the paper's web site, and added my own. Joe
...
The "trick" is that one can distribute a sizable IRA into multiple accounts so the SEPP amount can be calculated over an initial value of a chosen size to limit the collateral damage, so to speak.
"joetaxpayer" wrote
I have seen three other non-trivial factual mistakes in the last two months in financial planning columns. I suppose these columns do more good than bad. Still, I would trust a well-cited majority answer at internet fora like this before I trusted a questionable statement in a newspaper column. My experience with early withdrawals, and double checking with Pub 590, shows Joe and the others here are correct, and the ChiTrib statement is wrong.
So you calculate the SEPP only on one or more IRA accounts of your choosing? But that still might not work. Say you had 250k in your IRAs and wanted 5k for hardship reasons just for the near future, say
6 months. If you rollover 5k into a new IRA and take SEPP's from it, then you have to do it for 5 years or age 59.5. Assuming your age is 39.5, that is 20 years; with a monthly payment of around 5000/20/12 $20.83. Actually, my formula is not right because I have to use either the amortization method, annuitization method, or required minimum distribution (RMD) method, but I have no idea where to find those formula. In any case, the monthly payment will be too small. If you increase the amount in your IRA from which you will do the SEPP, you'd be eating up your retirement money till age 59.5. Is there a way around this? It seems that you could make the interest rate super high, but page 4 of?x?¥UMoÛF½óWÌÉi?U ¸Aí4ë¸E¶? WäH??÷C ûëûfi9N¤AJ?¸?};ó?¡çN¶?ùÚKêÃÛÑ4"e% ^"?¯?u]¼¢¾?QÝ/?g®,?N\é8æèióë í?'?ç»?þ°?í8£?!>?$ÓRÏÞJm+êÍ??¡$úK5fË?j!i%þ ô l| ØHZ78!G³?RO£$O?£õ¬ÐÌ?µ??R¾Ä;´?×ý?®nÞ]?ßß?¸£??««Ëëû?÷ ÓÝå?Hî!!»@+?r§Z?ßQIæS5dÖL'¿?'{I+ÒÑC?x½6Ó_²??$?©2?jðz?"?¡`ÿ1?éýí9Y?»ÔF?¼nªJIPZã.eÓéZ?]*z[¥ÖD® ó?Uë¬*L[Ó&&Y?Ù® ì4?¬qk;¨¦'TÒ*?ÇöÚt¨:K???_õÝIfë)Où??×Äe.ÄS'~*ý©8d¨Fù J?W~#ú=?ÌIZê?ä$Ò ~+?1 ???O??¸©i?ýÁÕÉF-=¾íUå .Ðß)d³çô ì@«?WÌøâ?ÄÅ??k?©ýkáà^DZgO)+ÒA^²ò?tg,GB+Êrh? þXq??7ãD?ÐåQä?×?:³Qê«X°@ñä6 ÚA ¸G9~°w?¯?rhK
I don't understand. Why can't someone with a $10 million IRA withdraw $50,000/year as a SEPP?
Seth
It's under rules for the exception that "Distributions made as part of a series of substantially equal periodic payments over the life expectancy of the owner or life expectancies of the owner and the beneficiary."
The requirement is that the withdrawal be in the form of an annuity in shorthand-speak. You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply. The ?required minimum distribution method,? when used for this purpose, results in the exact amount required to be distributed, not the minimum amount.
It is based on the actuarial tables to disburse the entire account starting balance over the lifetime of the annuitant and beneficiary if any; hence the amount to be taken out is not of your choice but based on age and initial value. At a fixed age, got get more annually you have to start w/ a bigger pie, but that may deplete the account before desirable if are too young.
The early distribution is a limited-size loophole.
It's described in Pub 590 and references...
Because Congress is the Mommy, and Congress says so. A SEPP must be based on life expectancy. See IRS Publication 590.
Right, Phil. But from my "Neat IRA tricks" collection comes this: If your income is below the threshold for Roth conversion (I know, this will not apply to the $10M man above, now, but it will in 2010) you can convert money now and each year, so that in five years time you may take withdrawals, and now have them subject to any penalty. And by converting each year (from IRA to Roth IRA) to replace those withdrawn Roth funds, you can withdraw any amount you like, up to the total that's aged five years. Joe
In a pinch you can make pancakes without milk and eggs. What does either have to do with SEPPs, which were the topic of discussion?
SEPP is a strategy to withdraw IRA funds and avoid the 10% penalty. My strategy has the exact same result, except it avoids the 'withdrawal till 59.5' requirement. BTW, the topic was not even SEPP, but penalty free withdrawal based on job loss, which of course isn't part of the regs. No idea where the pancakes came into this, but no eggs or milk, and you'd have matzoh, which is right for this time of year. But I'm sure you knew that. Joe
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