Here at the Bradford Pine Wealth Group, we believe in educating and informing our clients. In addition to providing guidance on investment options and strategies, we feel it’s important to include insight on the nuts and bolts of account management. One area that people generally don’t know about is the list of possible exemptions to IRA account restrictions. While we generally advise against dipping into retirement savings ahead of time, we believe it’s important for people to know about and understand their options.
Normally, distributions from any retirement savings account, such as an IRA Rollover, may begin at age 59.5. Distributions taken before this time are subject to a 10 percent distribution penalty on the amount withdrawn in addition to income taxes, with the exception of Roth accounts, which are only subject to penalties.
However, unexpected job transitions or unforeseen expenses can occur at any time, and in these situations, it’s important to know that your retirement savings can be put to immediate use. Prolonged unemployment, medical needs, or even a home purchase or education expenses can qualify for early distributions with out penalty. However, it’s important to know that using your IRA has serious drawbacks and poses a risk to the long term growth of your savings. As such, these assets should only be considered a last resort.
Early distributions can be exempted from penalties if they meet certain standards of hardship or need. For example, one may draw funds to help one get through a sudden tragedy such as permanent disability. Similarly, you may use your savings to cover medical expenses if they represent more than 7.5 percent of your income, or to cover the cost of health insurance when faced with unemployment for more than 12 weeks.
You may also take a distribution of up to $10,000 in order to buy a first home for yourself or a family member, and retirement plan savings may be used to cover qualified education expenses, again for either yourself or a member of your family. Finally, it is possible to set up a lifetime annuity from your IRA or 401(k) at any time regardless of your age. While this income stream would not be subject to penalties, it must be set up to continue in perpetuity.
It is important to remember that even qualified early distributions are taxed at your normal income tax rate unless taken from a Roth account. I advise you to consult with your accountant prior to taking advantage of an exemption. It is a decision that should be considered carefully because it can have serious repercussions on your retirement planning. For more information about the specific exemption requirements, look up Form 5329 on www.irs.gov.
While early distributions should only be considered as a last resort, it can be comforting to know that your retirement savings can help you through a difficult period should the need arise. This flexibility is built into the retirement savings system, so long as you keep in mind the possible pitfalls they present to your retirement planning.
For more detailed information about rolling over your 401(k) or about managing your IRA, I highly suggest downloading my free eBook, “10 Tips You Need to Know About Your IRA Rollover”. This short book is packed with critical information that will help you make the right decisions about your retirement savings.
Written by Bradford Pine
Bradford Pine Wealth Group – New York City Financial Advisors
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