That’s exactly how I would describe most investors when they hear about distributions from IRAs and qualified retirement plans.
First, let’s blame this on the lawmakers. If there’s a way to confuse a simple rule or law, they sure have a knack for doing it. The whole idea of taking money from these accounts would have probably been simpler if it had been even years like 60 and 70 without the half stuff thrown in there.
Oh well. I guess we have to live with it.
Recently I discussed what to do with funds that you are required to take called Required Minimum Distributions (RMDs). Now I want to cover early or regular distributions. These withdrawals can be taken at 59 1/2 without a penalty.
Here’s the confusion, you can take money at any time in any amount, however before 59 1/2 you will pay a 10% penalty and applicable taxes. This age is simply the time that the penalty disappears.
Remember, you are not required to take a single penny out of your IRA until you reach 70 1/2.
Now let’s say you want to, or need to take a stream of income from this IRA before 59 1/2. Can you avoid the penalty? Yes.
An IRS rule that allows for penalty-free withdrawals from an IRA account. The rule requires that, in order for the owner to take the money penalty-free, he or she must take at lease five “substantially equal periodic payments”. The amount depends on the owner’s life expectancy with IRA approved calculation methods.
So here are the rules:
59 1/2 and under – 10% penalty and taxes OR
59 1/2 and under – 72 (t) distributions and pay taxes but avoid 10% penalty 59 1/2 – taxes
70 1/2 – must take distributions and pay taxes
Hopefully this clears things up. If not, call or email and we be glad to go over your particular situation. If you liked the article, no taxes or penalties will be assessed!
Once distributions begin pursuant to Rule 72(t), distributions must continue for five years or until you reach age 59½, whichever is longer. Systematic distributions of this nature can quickly deplete the assets of a retirement account making it difficult or even impossible to sustain the desired income throughout all of retirement. Additionally, if the account owner wishes to cease the distributions before the required time period has expired, the IRS will impose a penalty at that time.