Early Withdrawal

Archive for November, 2006

Question: If your savings account for emergencies is all set, is max’ing your Roth IRA contributions the best strategy?

It seems like the Roth IRA is so flexible: you can put your kids education savings in there, you can withdraw principal after five years without penalty, etc.

Answer: That is a good plan, though, I wouldn’t leave too much in a bank account. A better way to save for emergencies is put the savings in a money market fund. It works similar to a savings account, except that they may have a higher rate of return. When you want to take money out, it would take 5-7 days to receive a check.

If you want to save for your kid’s education, then a 529 plan may be a good choice, depending on how old your kids are. If they are in high school, opening a 529 plan may not be a wise choice because it takes awhile to see any returns on your investment.

As for your Roth IRA, you should only use it as a way to save for retirement. While the IRS allows you to use it for other purposes such as education or first time home buyer, IRA main purpose to help you accumulate wealth for retirement.

Anyway, you have a good game plan to save for the future. You might want to see if you have beneficiaries in your savings. Better yet, you should get a Will.

Retirement Plans & Investments : What Is a Coverdell IRA CD?

Question: Would an IRA rolled-over from a 401(k) be subject to the same mandatory distribution rules at age 70 1/2?

Suppose I’d like to roll over an inactive 401(k) plan to a roll-over IRA. Normally the 401(k) would face mandatory distribution for each of the some 15 (?) years of life-expectancy beyond age 65. So for example I believe a $1.5M balance would have to be drawn down to zero in 15 years. (That doesn’t mean the money would disappear, withdrawals had to be taxed). Would I be able to defer tax with an IRA and pass it onto my children after I die?

Answer: 401(k) and IRA are currently subject to the same RMD (starting age 70.5).

One thing you may want to consider is gradually converting some to a Roth IRA (unless your income is too high). Tax would be due on the amount converted which is best paid from other sources (I reduced my W-4 allowances to increase withholding). If withholding is taken from the distribution, the withholding itself would be subject to 10% penalty.

There is no required minimum distribution from a Roth IRA, so it can continue to grow indefinitely past retirement (to cover inflation in later years, a lump sum without tax, or to leave to heirs).

There will be a special deal in 2010 to convert and then spread tax over 2011 and 2012. But I have been converting gradually about $10,000 per year to stay under the next tax bracket.

PS: It is best if any retirement plan beneficiaries are real people, not your estate or trust.

IRA Investing

How much can I withdraw under Rule 72t?

The question of how much one can withdraw under Rule 72t IRA Early Withdrawal often comes up. Many people think there is an upper limit like most IRA rules that apply to Rule 72t distribtution. The truth is the amount you are allowed as IRA Early Withdrawal under the 72t is more complicated. Also, you cannot pick the IRA Early Withdrawal amount under the Rule 72t.

How much can I withdraw early under Rule 72 t?

Under the 72t distribution rules, you can’t just pick an amount of money you would like to take out of your IRA each year.

Rather, you must use an approved method to calculate a stream of ��substantially equal payments�� to take place over the payment period. This is sometimes referred to as a 72t Retirement calculator or 72 t calculator.

The Internal Revenue Service (IRS) has approved three methods of calculating the amount of these 72t Distributions, under Rule 72t. You can read more about how to calculate these Ira Early Withdrawl amount in later sections of this Early Withdrawl website.

72t Required Minimum Distribution (RMD) method:

Under this Required Minimum Distribution (RMD) method, you simply divide your IRA balance for that year by the ��life expectancy factor�� found in an IRS Life Expectancy table, just as you would calculate your Required Minimum Distribution (RMD) beginning at age 70�.

Under this Required Minimum Distribution (RMD) method you recalculate:

• your account balance,
• life expectancy and
• the resulting payment amount each year.

You may use any one of the three life expectancy tables found in the Supplement to IRS Publication 590,

• the Uniform Table,
• Single Life Table or
• Joint Life Table (with your eldest beneficiary).

Your account balance for the purpose of this 72t Required Minimum Distribution (RMD) method is determined as of December 31 of the prior year or a date reasonably close to the payment beginning or anniversary date (e.g., if your payment year runs from July 14, 2002 to July 13, 2003 you may use the June 30 account balance).

Unlike RMDs at age 70� you may not take more than the minimum amount.

72t Amortization Method

This 72t Amortization Method, based on a system commonly used in many mortgage repayment schedules. The 72t Amortization Method relies on:

• your life expectancy (determined using one of three tables in the IRS Publication 590-Supplement) and
• an interest rate that may not exceed 120% of the Federal mid-term rate for either of the two months immediately preceding the month in which payments begin.

Distributions, under this 72t Amortization Method, are then calculated as a stream of equal payments that will bring your account balance to zero at the end of the life-expectancy period. The annual 72t Amortization Method payment is calculated only once and used every year until 72(t) payments end.

72t Annuitization method

The annual 72t distribution payment amount is determined by dividing the IRA balance by an annuity factor that is the present value of an annuity of $1 per year beginning at the IRA owner’s current age and continuing for life using the current account balance, the Mortality Table in Appendix B of Revenue Ruling 2002-62 and the interest rate described above for the amortization method. This amount is also calculated only once.