Years ago, a client referred me to a songwriter. The first thing I noticed about the songwriter is that he and his wife had liquidated his IRAs to buy a bigger house. Now this was prior to the first home exception of $10,000. I cringed. The upshot was that the large distribution sling-shotted the couple into a much higher tax bracket, triggered additional income tax, and a 10% premature penalty.
There are some exceptions, now, but before you make the plunge into that pot of gold reserved for the golden years, you should know the rules:
1. Payments you receive from your Individual Retirement Arrangement before
you reach age 59 ½ are generally considered early or premature distributions. This was the situation of my clients.
2. Early distributions are usually subject to an additional 10 percent tax. As previously discussed, there was no way I could get them out of this penalty.
3. Distributions are reported to the IRS and identified such as rollovers or due to death.
4. Distributions you roll over to another IRA or qualified retirement plan
are not subject to the additional 10 percent tax. You must complete the
rollover within 60 days after the day you received the distribution. These are also not subjet to income taxes also.
5. The amount you roll over is generally taxed when the new plan makes a
distribution to you or your beneficiary.
6. If you made nondeductible contributions to an IRA and later take early
distributions from your IRA, the portion of the distribution attributable to
those nondeductible contributions is not taxed. If you do not need a tax deduction (yes I have had client’s like this), then this may be a good strategy to shelter some investment income.
7. If you received an early distribution from a Roth IRA, the distribution
attributable to your prior contributions is not taxed.
8. If you received a distribution from any other qualified retirement plan,
generally the entire distribution is taxable unless you made after-tax employee
contributions to the plan.
9. There are several exceptions to the additional 10 percent early
distribution tax, such as when the distributions are used for the purchase of a
first home (up to $10,000), for certain medical or educational expenses, or if
you are totally and permanently disabled.
The place to start is to not NEED the extra money. Try to live within your means so as to not be tempted to withdraw your retirement nest egg. If you need help in creating a budget, or analyzing your expenses, contact your CPA.
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