Ask Money

Getting IRA money early

Chris Farrell Feb 22, 2010

Question: I’ve been listening for ages trying to figure out how to continue my life while unemployed without losing my home. Today I finally heard Tess ask if there was ANY instance where one should take out their retirement funds early and the answer was pretty much no. (It was actually if you had a dying child that needs surgery insurance wouldn’t cover.) My home is worth about $320K right now. I owe $146K on the mtg. and 45K on the HELOC. I had been running a company that my late husband and I started in 1996. But in 2008 our main client was sold to Oracle and I became redundant. (My husband passed away in 2002.) There is also a $45K commercial loan left from the business that I had been paying back from personal since the business is an ‘S’ corp. and I’m personally the guarantor on it. I’ve now started to default on that. I had hoped to refinance and roll all those debts into one mortgage but it’s not possible while unemployed!

Fortunately I had saved using CD’s, laddering them to withdraw monthly to cover expenses. That has lasted for two years. Now I am at the end of that. I have been looking for work with no success. I am 55 years old and I only started saving for retirement in my 40’s. I only have about $100K in my IRA, but I don’t want to lose my home. I’ve gone back to school to upgrade tech skills, but now money for that has run out as well. Beside applying for jobs, I’m looking for all kinds of ways to generate income, but this all takes time. Any suggestions? Isn’t there any way I can get at that IRA money without giving half of it to the IRS? Thank you for being there for us! Heidi, Lake Monroe, FL

Answer: I don’t need to tell you that you have a lot financial pressure and many different troubling issues going on at once. But to get to your specific question, there is a way to get at the IRA money without paying a penalty. (I am assuming that you have a traditional IRA.)

In general, you can’t take money out of a traditional IRA before age 59 ½ without paying a 10% penalty on the amount you withdraw. However, you can escape the 10% penalty with IRS Rule 72T.

Here’s how a general outline of how it works (remember, all IRA rules are more complicated than a brief summary; but this will give the basic outline.) You commit to a fixed payout until you reach age 59 ½ and for a minimum of 5 years (whichever comes last). For instance, let’s say you start making withdrawals at age 56 you would have to stick to the schedule until you’re 61 years old. The IRS offers you three options for taking your money out. Once you’ve passed the minimum requirements for time and age with a 72T withdrawal you can then change your payment schedule.

The income you take out of the IRA during withdrawal is taxable at your ordinary income tax rate. (Of course, you won’t have a very high income.) And if you change the schedule or run out of money in the IRA during the commitment period you will be assessed a penalty on the sums you’ve already taken out.

The reason why most people in the financial advice business steer clear of a 72T is that it’s a risky strategy. Financial planners tend to worry that it creates a genuine risk of running out of retirement assets early. So, yes, you can tap the IRA money without penalty and giving half to the IRS. Kiplinger’s has a good article on taking the money out early here.

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