JoeTaxpayer

It seems the upper and lower classes are both increasing in numbers. A dwindling middle class. Tough times indeed.

With all the RothMania spreading, especially since the income limits for converting from a traditional to Roth have been removed, I’m afraid that the needed discussion regarding the Traditional IRA has been neglected. So today, I’d like to discuss how you can avoid a penalty while withdrawing money from your IRA, a few better than others.

• The Section 72(t) Withdrawal – I went into some depth on this one last year, the simple explanation is that you can take a “series of substantially equal periodic payments” for at least 5 years or age 59-1/2 whichever comes second. This is an excellent choice if you are in your late 40’s/early 50’s and either have enough to retire or have other income you know will kick in later, such as a pension.
• 401(k) withdrawal after age 55 separation. 401(k)?? Where did that come from? Well, you see, most 401(k) accounts permit a transfer from an IRA. So, if you are 55 are know it’s your last year working, you may be able to transfer the IRA into your 401(k) and take advantage of a not so well know rule that permits withdrawals if you leave the company at 55 or older. This leaves you more flexible as you avoid the hassle and term involved with the 72(t). Of course, if the 401(k) fees are high, you’d better think twice before pulling this stunt.

• Die. Well, I hope not, I need all the readers I can get. But, if you should have a loved one pass on and leave you money in their IRA, your withdrawal are not subject to penalty, just ordinary income tax (unless the IRA is a Roth or have post-tax money in it). Normally, you are required to begin taking RMDs (required minimum distributions) the year after you receive the money, but you don’t have to take more than that.
• Disability – From IRS Pub 590: You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration. A short term inability to work does not pass this definition.
• Medical expenses which exceed 7.5% of your adjusted gross income. It’s a pretty high number, hopefully, you’ll never hit it but good to know.
• “First Time” home purchase. The quotes are not to be cute, the IRS gives you the first time status if you’ve not owned a house for 2 years. If that’s so, you may withdraw up to $10K to use for the purchase and pay tax only, no penalty.
• Higher education – for you, your spouse, kids, or grandchildren. As with the home purchase, you still don’t avoid taxes, just the penalty. You can take out the full expense, including tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.

That’s it for now, 7 ways to withdraw from your IRA penalty free (but not tax free). I hope you find this useful.

Joe

This past week, Jane and I saw Roger Waters perform The Wall. I missed it when Pink Floyd first released and tour this album 30 years ago, and was glad to get the chance to see it live. More than anything, the crowd, ranging from people in their 60s to young kids that needed their parent to take them, showed me one thing. This music was timeless, as I knew even 30 years back that my parents’ criticism would fade as I finished school and moved out, but the music from my teens would still be around decades later. The Who playing halftime at the Superbowl was another example of the staying power of that genre of music. I’m not critical of today’s new music, and I won’t try to predict what bands from today will be still playing decades hence, only time will tell. Now on to the roundup.

First, this week, my fellow Money Maven Network Member Tom Drake has launched a personal finance blog aggregator called Money Index where he lets you choose a general category of interest, Taxes (The one I am in!), Frugality, Extra Income, Canada, and many others. The index also shows the titles of the last five posts from each blogger. So if you need a fix, but are pressed for time, a quick glance will find you some great reading. Good luck with the new site, Tom.

Next, Roshawn Watson asks Will Mortgage Rates Really Drop to 0%? I don’t think so, but Shawn’s post goes into an in depth discussion of mortgages and is an interesting read. Either way, the question is intriguing one, if only to think about the unintended consequences after rates one again began to rise.

A blog I hadn’t read before, Faithful With a Few discussed You Just Won $1 Million…Now What? No comment, me included, remarked that Uncle Sam would have his many hands out for nearly 40% of that between state and federal. So the real question is “what would you do with $600K?” In general, I think that people in debt, living on a tight budget will react to this quite differently from those who are in a “live beneath your means” lifestyle. $600K or $1M would find its way to our retirement savings, no crazy trip, no new car. I don’t know that I’d even feel compelled to go out to dinner that night. I’d be too busy reviewing asset allocation and the new number for “years to retirement.”

Speaking of retirement, Wealth Pilgrim offers some great advice – Post Retirement Average Income Crisis – How To Avoid It. In this post, Neal explains how many people ask what the retirement average income is for others. Neal helps to turn their attention away from the average (after all, do any of you aspire to just be average?) and to understanding their actual forecast need. Good job, my friend.

Don’t Mess With Taxes posted Tax the rich, whoever they are. She hits on an interesting point, that ‘rich’ is tough to define. Is it $200K for singles, $250k for couples as Obama suggests, or is it more complex that just that? $100K doesn’t go as far in New York City as it might in Austin Texas. Congress has yet to decide on this, and the Bush cuts are now fewer than 90 days from expiring.

Another good week of reading behind us. Have a great week ahead.

Joe

Indeed, part of the issue is the Catch-22 we are in, as illustrated above. I know that NBER declared the recession over, but it will still take time for the economy to be robust again.