59 1/2 Rule

[WilliamG]

I just turned 59 which means I should "turn" 59 1/2 in September. I have always figured that is when I would be able to begin IRA withdrawal without penalty. In our newspaper yesterday, a financial column said you could "begin withdrawal today so long as you turn 59 1/2 by Dec 31". I am thinking this is bad advice, but figure if there is any truth to the statement someone frequenting the forum would know. Is this guy right or is he confusing the wording for 70 1/2 RMD rule?

Thanks! Bill

 

[intercst]

I just turned 59 which means I should "turn" 59 1/2 in September.  I have always figured that is when I would be able to begin IRA withdrawal without penalty.  In our newspaper yesterday, a financial column said you could "begin withdrawal today so long as you turn 59 1/2 by Dec 31".  I am thinking this is bad advice, but figure if there is any truth to the statement someone  frequenting the forum would know.  Is this guy right or is he confusing the wording for 70 1/2 RMD rule?

Thanks!  Bill

The financial columnist is confused. For safety's sake, I'd wait until the day after you turn 59-1/2 to make the first penalty-free IRA withdrawal.

If your 59th birthday is April 2nd, you turn 59-1/2 on Oct 2nd. I'd wait until Oct 3rd to make my withdrawal.

intercst

 

[John Galt]

Don't believe I ever heard of drawing from the IRA
without penalty in the year you turned 59 1/2. But,
could be true. I only have 2 days to go to hit 59 1/2
so it looks like I might make it

John Galt

 

[Cut-Throat]

If you can, isn't it always a good idea to avoid taking money from your IRA, until you are forced to?

From the Tax Deferral Standpoint? - All of your earned income would be tax deferred until it's drawn out.

 

[PaperSniper]

You're talking without the "SEP" penalties, right? I was under the impression the 59.5 years of age means what it says.

I believe there is a piece on this very topic on the home page here or at http://www.retireearlyhomepage.com/

 

[cute fuzzy bunny]

You can actually draw from an IRA far earlier than 59 1/2 without penalty. Something about making significant, consistent and even withdrawals gets you through a loophole. Rule 72 or 73 or some such thing.

I dont have the ORP reports in front of me, but my recollection is that it recommended tapping the tax deferred AND the after tax amounts, albeit the tax deferred withdrawal percent was a lot lower to start with.

 

[prbob]

Everything I have read says 59.5 is 59.5.

With regard to withdrawals from an IRA/401K after 59.5, it sometimes may be worth withdrawing before one needs the cash. Two reasons for participating in an IRA is to take high tax rate income and defer paying incomes taxes by putting in an IRA. The second reason is the monies in an IRA can be invested and if a gain is to be taken, you can take the gain without taxes and re-invest.

If you are past 59.5 and are not yet receiving SS or pension, you might be able to take withdrawals and effectively not pay any tax on those withdrawals since your other income may not be that high during this time period.

If you do a lot of trading, it is probably best to leave it in the IRA. However, if you invest for the long term, you may wish to withdraw some of the funds whcih when added to your other income for that year, will allow you to pay no tax or very little tax. Those funds can be re-invested in the exact same vehicles you had in your IRA. Of course, any dividends or interest will be taxable in the future.

 

[BigMoneyJim]

WilliamG,

I got curious myself (even though 59 1/2 is about 25 1/2 years away for me) and looked around but couldn't find anything definite; then I noticed your first answer was from intercst; I bet he's right.

And looking at this IRS topic (link) in the 2nd paragraph from the bottom the wording is very different for the 59 1/2 and 70 1/2 rules, so I think that guy was confusing the rules.

You didn't ask, but there are varying reasons why you might withdraw from IRAs earlier or later depending upon your other assets and income and tax bracket. intercst has an article here (link) about it, and I believe the ORP mentioned earlier is here (link) and from what I've heard helps you optimize withdrawals to save on taxes.

TH, you're speaking of the 72(t) exception where you can make SEPP's, but you're commited for 5 years or until 59 1/2, whichever is longer, so in any case I can imagine it would make more sense to wait a few months if you just turned 59.

 

[WilliamG]

Thanks everyone for your replies. I agree that this fellow probably got mixed up, but it is really scary that such "advice" can be distributed in a mainstream paper.

I have pretty much laid out at least an initial cash flow plan for age 55 (when I early retired) thru 62 when I will start SS. Will take a lump out when I turn 59 1/2 in September and then begin a monthly withdrawal in October. The lump is being taken in a year in which we would have very little income otherwise and am looking at tax optimization over next 3 years. I think when to take IRA and when not is a very personal decision based on individual circumstances. We plan to take from IRA at a flat rate for quite a while and supplement with already taxed monies to keep us in lowest possible marginal tax bracket. It helps that the major slug of our already taxed monies is in I Bonds which are effectively also tax deferred instruments.

Best regards, Bill

 

[renferme]

BigMoneyJim says "TH, you're speaking of the 72(t) exception where you can make SEPP's, but you're commited for 5 years or until 59 1/2, whichever is longer, so in any case I can imagine it would make more sense to wait a few months if you just turned 59. "

One more thing: when you start taking money out using the 72(t) method, you had better not run out of money before the end of the 5 year period.. If you take out too much, or your investments lose money during that timeframe, and you run out of money, you will owe penalties on all the withdrawals.

 

[renferme]

BigMoneyJim says "TH, you're speaking of the 72(t) exception where you can make SEPP's, but you're commited for 5 years or until 59 1/2, whichever is longer, so in any case I can imagine it would make more sense to wait a few months if you just turned 59. "

One more thing: when you start taking money out using the 72(t) method, you had better not run out of money before the end of the 5 year period.. If you take out too much, or your investments lose money during that timeframe, and you run out of money, you will owe penalties on all the withdrawals.

 

[malakito]

...

One more thing:  when you start taking money out using the 72(t) method,  you had better not run out of money before the end of the 5 year period..  If you take out too much, or your investments lose money during that timeframe, and you run out of money,  you will owe penalties on all the withdrawals.

I believe these penalties were eliminated by one of the recent tax law changes. Can anyone confirm?

 

[intercst]

I believe these penalties were eliminated by one of the recent tax law changes.  Can anyone confirm?

That's true. See link:

http://www.retireearlyhomepage.com/sepp2003.html

intercst

 

[Dogcliff]

There is a similar sounding 'in the year you turn' provision for drawing 401K (TSP) penalty free so long as you retire IN THE YEAR that you turn 55.  

dc