Early Withdrawals from IRA? Willing to pay the 5%?

[njonge01]

Instead of, or an parallel with, a program of Substantially Equal Periodic Payments, I am considering withdrawing funds from my IRA. A few points

- I am only 47, so I don't want to be locked into a 12 year schedule of SEPP's until I am 59.5
- My IRA portfolio has grown very well. I'm at 1.5 million, and that puts me well ahead of a schedule for retiring at 60
- I'll be paying income tax on the WDs anyway... is an additional 5% all that bad?

I wouldn't be spending these dollars foolishly and they would allow me to consider employment opportunities during semi-retirement, that may not pay what I make now, but are more enjoyable.

Thoughts?

[TN_INVEST]

Not sure I'm following you about the extra 5% part.

Nonetheless, here's my opinion:

Mathematics say you will be better off if you don't take it. However, you have stated a pretty good quality of life decision to go ahead and take it now (and it's not like you're going to be destitute if you do take some of your money now).

Go for it, just don't be reckless.

[njonge01]

Quote:

Originally Posted by TN_INVEST Not sure I'm following you about the extra 5% part. Nonetheless, here's my opinion: Mathematics say you will be better off if you don't take it. However, you have stated a pretty good quality of life decision to go ahead and take it now (and it's not like you're going to be destitute if you do take some of your money now). Go for it, just don't be reckless.

Thanks TN! Yep, I meant to put 10%!! (My scenario on my spreadsheet has me withdrawing 50,000 bucks with a 10% additional penalty of $5K... I guess that's why I had "5" in my head. :-D

[pimpmyretirement]

Maybe you could figure out how to use a roth conversion to avoid that penalty?

[njonge01]

Quote:

Originally Posted by pimpmyretirement Maybe you could figure out how to use a roth conversion to avoid that penalty?

The good thing about the Roth conversion, is that the dollars "converted" and any gains on those dollars are not taxed. The downside in my scenario, is that I pay income tax on the withdrawal, and then the dollars aren't available to me until 59 (unless I am mistaken). I will convert some dollars to a Roth. But my plan is to convert dollars that I don't plan on needing until later in full retirement.

[JOHNNIE36]

Quote:

Originally Posted by njonge01 Thanks TN! Yep, I meant to put 10%!! (My scenario on my spreadsheet has me withdrawing 50,000 bucks with a 10% additional penalty of $5K... I guess that's why I had "5" in my head. :-D

Just thought of something. When I take money out of a CD that has not matured, I have to pay a penalty also. That would probably go to the CD holder; however, I know that penalty is deductible on my income taxes. I don't know about deducting the penalty on early WD from IRA. Check it out.

[pimpmyretirement]

I know money contributed directly to a Roth may be withdrawn without penalty. When I did it, my Roth was worth less than my original cost basis, so I paid no taxes or penalties emptying the account.

I have no idea if a converted Roth is treated differently. I bet someone on the board does though.

[TN_INVEST]

Quote:

Originally Posted by pimpmyretirement I know money contributed directly to a Roth may be withdrawn without penalty. When I did it, my Roth was worth less than my original cost basis, so I paid no taxes or penalties emptying the account. I have no idea if a converted Roth is treated differently. I bet someone on the board does though.

Might take a little research, but something tells me there is a 5 year waiting period on new Roth contributions. I'm not entirely sure about the converted dollars, although something in the back of my brain wants to say there is a 5 year wait unless the Roth was previously established (definitely worth the time to do a little research, though). Thumbs up, pimpmyretirement

[kaneohe]

Quote:

Originally Posted by JOHNNIE36 Just thought of something. When I take money out of a CD that has not matured, I have to pay a penalty also. That would probably go to the CD holder; however, I know that penalty is deductible on my income taxes. I don't know about deducting the penalty on early WD from IRA. Check it out.

Not aware of any such thing. The provision for the CD penalty is a bit different. The 1099INT credits you with the gross interest before penalty.
When you deduct (actually adjust) the penalty, the net result is that you are only taxed on the net interest you received from the bank.

For early withdrawal from IRA, the 1099R reflects the gross (and net, if no withholding) withdrawal from the institution and you are taxed on that amount (assuming no basis). The penalty comes later from another party.....IRS

[kaneohe]

Quote:

Originally Posted by pimpmyretirement I know money contributed directly to a Roth may be withdrawn without penalty. When I did it, my Roth was worth less than my original cost basis, so I paid no taxes or penalties emptying the account. I have no idea if a converted Roth is treated differently. I bet someone on the board does though.

Below is a table from KAwill from the fairmark.com site
Funds from a Roth conversion look like they are still subject to the penalty
if withdrawn at age<59.5 and if the 5 yr conversion clock is still
running (if withdrawn < 5 yrs from conversion). Note that earnings are still subject to tax and penalty but earnings come out last.

Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No, Penalty-No
Conversions: Tax-No ,Penalty-Yes (Taxable Portion)
Conversions: Tax-No, Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes, Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No, Penalty-No
Conversions: Tax-No ,Penalty-No (Taxable Portion)
Conversions: Tax-No ,Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes, Penalty-Yes