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Did Retirement Arrive Earlier than Expected?

The recession affected most Americans, but it had a disproportionately large impact on older workers. All at once, rising healthcare costs, dropping home values and losses in retirement savings combined to create financial woes for those nearing retirement. In addition, the unemployment rate for those 55 and older rose, and older workers typically face longer job searches than younger ones. On average, those 55 and older take 35.5 weeks to find new employment, compared with 29.3 weeks for all unemployed workers.*

Some workers who were just reaching for the brass ring when the economy crumbled now find themselves forced to raid retirement accounts to make ends meet. That can be tricky, though, because access to tax-advantaged retirement accounts is restricted. But there are options for tapping your retirement nest egg early if you really need it.

Seeking Income

If you have a Roth IRA, you can withdraw your contributions, but not the account's earnings, at any time, tax- and penalty-free.**

Withdrawals from a traditional IRA are generally subject to a 10%tax penalty in addition to ordinary income tax if you're younger than 59½. However, there are exceptions. Penalty-free (but not tax-free) withdrawals are allowed for certain situations, such as death, disability, certain medical and medical insurance expenses, qualifying higher education costs and a first-time home purchase.

The 72(t) Exception

Another exception to the 10% penalty, sometimes referred to byte 72(t) section of tax code that permits it, is available to anyone; no qualifying event is required. You'll owe income tax, but not the additional 10%penalty, if you take distributions from a traditional IRA that are part of a series of what the IRS calls "substantially equal periodic payments." The payments are calculated over your life expectancy or over the joint life expectancies of you and your beneficiary. Distributions must be taken at least annually for five years or until you reach age 59½, whichever is later.

There are three methods you can use to calculate your substantially equal payments. The simplest is called the required minimum distribution method. In essence, you use the same calculations that older taxpayers make after they turn age 70½ and must take required minimum distributions. Only the resulting figure is not the minimum you must withdraw, but the exact amount. The two other methods – the fixed-amortization and fixed-annuitization methods – are more complicated and usually require professional assistance to calculate correctly.

The 72(t) exceptions apply separately to each IRA you have, so if you own multiple accounts, you don't necessarily have to take withdrawals based on your entire retirement nest egg.

We'll Help You Explore Your Options

Taking early distributions from funds intended for your retirement is rarely an ideal solution. But in some cases, it may be a reasonable alternative to carry you through a period until you can begin collecting money from another source, such as Social Security, a pension or new employment. We can help you rest easy knowing that you're making the best choice for your situation. Contact us today.

* Source: Bureau of Labor Statistics, February 2010, www.bls.gov.

** Premature distributions from a Roth IRA – generally those made before you are age 59½ or older and have held the account at least five years – are subject to ordinary income tax plus a 10% tax penalty.


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