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Should I avoid traditional retirement accounts?
Old 08-10-2007, 07:15 AM   #1
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Should I avoid traditional retirement accounts?

I am self-employed, and the only retirement account I have is a ROTH IRA that I max. In looking to put additional funds in the market it's hard for me to avoid the conventional wisdom that it's important to max retirement accounts (for me that would mean opening a SEP IRA) at a young age. I am now 23 and conservatively I feel pretty confident I'll be able to retire if I so choose in my early 40s, hopefully sooner depending on how my income continues to grow. When I see the harsh penalties on drawing early from retirement accounts they don't seem like the right choice but of course I also hope to be alive at age 60 and beyond so maybe these accounts are just for that time, and I need something else (what?) to draw from for my possible early retirement? What should I do?
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Old 08-10-2007, 08:13 AM   #2
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I think you should. The tax-deferment is a huge advantage. You are misinformed on the penalties. There are no harsh penalties for withdrawing early if you do it the right way.

So go ahead and contribute $45,000 this year to your tax-deferred retirement plan. While you are at it, go ahead and contribute $4,000 to your Roth IRA and then put the other $140,000 in your taxable account, but invest in a tax-efficient way.
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Old 08-10-2007, 08:21 AM   #3
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Please inform me! What is the "right way"? Are you saying this article is incorrect? IRS rules for early withdrawal of IRA money (Page 1 of 2) Everything I've read has the same info about the 10% penalty.
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Old 08-10-2007, 08:47 AM   #4
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Start here: Retire Early: Can I withdraw money from my IRA before age 59 ?
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Old 08-10-2007, 08:50 AM   #5
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Your link hid the the info:
Quote:
You also can get IRS-approved early access to your nest egg if you take IRA money on a specific schedule. Known as substantially equal periodic payments, this method allows you to begin withdrawing from your IRA early as long as the amounts are determined by an IRS-calculated life-expectancy table.
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Old 08-10-2007, 09:04 AM   #6
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Wow thank you for the information I had never heard of that. .
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Old 08-10-2007, 11:08 AM   #7
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It is, unfortunately, a well-kept secret. There are even people who pay the 10% penalty because they are unaware of this.
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Old 08-10-2007, 12:28 PM   #8
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Quote:
Originally Posted by laurakr View Post
I am self-employed, and the only retirement account I have is a ROTH IRA that I max. In looking to put additional funds in the market it's hard for me to avoid the conventional wisdom that it's important to max retirement accounts (for me that would mean opening a SEP IRA) at a young age. I am now 23 and conservatively I feel pretty confident I'll be able to retire if I so choose in my early 40s, hopefully sooner depending on how my income continues to grow. When I see the harsh penalties on drawing early from retirement accounts they don't seem like the right choice but of course I also hope to be alive at age 60 and beyond so maybe these accounts are just for that time, and I need something else (what?) to draw from for my possible early retirement? What should I do?
I am in the process of ER right now, and just turned 30, and the same as you, I was self-employed, since I was like 22 or so.

I have a IRA, and quite frankly it annoys me, as we are calling it quits very young.

But one way I found around that, is we keep our IRA's in CD's and just have them pay their interests into our RE account. We do not have to pay any penalties or anything as long as we do not touch the principle, and depending on my income , we can just keep the interests in the IRA also, if we do not want to go over a tax bracket.
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Old 08-10-2007, 12:51 PM   #9
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Originally Posted by laurakr View Post
I am now 23...
Congratulations on starting to plan at such a young age.

As others have said, nothings beat the tax-deferred saving accounts. The compounding effect of tax free gain is mind boggling.

I had an unfortunate conversation just last week with a 51yo DOCTOR who did not know that!?!
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Old 08-10-2007, 05:07 PM   #10
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But one way I found around that, is we keep our IRA's in CD's and just have them pay their interests into our RE account. We do not have to pay any penalties or anything as long as we do not touch the principle, and depending on my income , we can just keep the interests in the IRA also, if we do not want to go over a tax bracket.
?!?!?!? Are you saying that you have your IRA pay interest into a non-qualified account and you are not reporting that as a withdrawal? Has anyone else heard of this? I can't believe that this is allowed!
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Old 08-11-2007, 12:25 AM   #11
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?!?!?!? Are you saying that you have your IRA pay interest into a non-qualified account and you are not reporting that as a withdrawal? Has anyone else heard of this? I can't believe that this is allowed!
Well yea I report it, but as normal income. As long as I do not touch the principle of the CD of the IRA it is 100% legit. It is only a withdrawal if you take out principle.

Any local bank should be able to answer your questions about it.

Here is part of a email from the president of the people i bank with when he set it up

1) The CD will be located inside the IRA
2) The interest can be deposited into your existing account. (my RE interest account)

3) The interest earned will not be taxed until removed form the IRA and there will not be a 10% penalty to the IRS
4) We can set the interest from the CD to be deposit on any day.
5) The current rate for a one year CD that pays monthly in 5.10%.
6) Your beneficiary will not be affected in any way.
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Old 08-11-2007, 01:24 PM   #12
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3) The interest earned will not be taxed until removed form the IRA and there will not be a 10% penalty to the IRS
So you pay the 10% penalty for an early withdrawal?
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Old 08-11-2007, 01:44 PM   #13
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Originally Posted by Bigritchie View Post
Well yea I report it, but as normal income. As long as I do not touch the principle of the CD of the IRA it is 100% legit. It is only a withdrawal if you take out principle.

Any local bank should be able to answer your questions about it.

Here is part of a email from the president of the people i bank with when he set it up

1) The CD will be located inside the IRA
2) The interest can be deposited into your existing account. (my RE interest account)

3) The interest earned will not be taxed until removed form the IRA and there will not be a 10% penalty to the IRS
4) We can set the interest from the CD to be deposit on any day.
5) The current rate for a one year CD that pays monthly in 5.10%.
6) Your beneficiary will not be affected in any way.
If you remove any money from a traditional (not Roth) IRA, you have to pay income tax and have to pay the 10% penalty unless you are over 59.5, or do the 72t method of withdrawal, or an exception applies.
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Old 08-11-2007, 01:58 PM   #14
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Originally Posted by Bigritchie View Post
2) The interest can be deposited into your existing account. (my RE interest account)
What does "RE" stand for?

I've never heard of an IRA investment like this. Can you provide us a link to learn more about how these CDs and/or accounts work?
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Old 08-11-2007, 07:55 PM   #15
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ER=my early retirement account :-) I added that part.

Eridanus, it says "not" pay the penalty.

I do not really know much about how it works, but I can email the bank doing it for them, and ask for more information on how/what they did it. I will shoot him a email this weekend, and see if he can provide some more info for everyone.

I never touch the actual principle on the IRA either, just interest. You only pay the penalty if you touch the actual balance of the account. I just put the full amount into a large jumbo CD and have it pay out the interest only.

1st Tennessee bank does it for me.

My accountant for my business was the one that told us we could do it too, so that was what got me interested. I am really happy to be able to do it too, because it would suck, if I had to wait to touch anything till 59 or whatever.
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Old 08-11-2007, 10:32 PM   #16
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I hope we just have a miscommunication here.

If you take the interest from the CD out of the traditional IRA and deposit it into a non-IRA account or spend it, you must report the money as ordinary income on your taxes and must pay the penalty unless you fit in some exception. These are the exceptions:
  • death of the IRA holder
  • qualifying disability of the IRA holder (have to be totally and permanently disabled and unable to work).
  • substantially equal periodic payments (following the 72t rules)
  • certain medical expenses exceeding 7.5 percent of adjusted gross income
  • health insurance if an individual has been receiving unemployment compensation for more than 12 weeks
  • qualified higher education expenses
  • qualified first-time homebuyer expenses (up to $10,000 and haven't owned a home in the last couple of years)
  • conversion of Traditional IRA assets to a Roth IRA
  • distributions due to IRS levy
Otherwise, you owe the penalty if you are less than 59 and a half years old.
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Old 08-12-2007, 12:23 AM   #17
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Originally Posted by Martha View Post
I hope we just have a miscommunication here.

If you take the interest from the CD out of the traditional IRA and deposit it into a non-IRA account or spend it, you must report the money as ordinary income on your taxes and must pay the penalty unless you fit in some exception. These are the exceptions:
  • death of the IRA holder
  • qualifying disability of the IRA holder (have to be totally and permanently disabled and unable to work).
  • substantially equal periodic payments (following the 72t rules)
  • certain medical expenses exceeding 7.5 percent of adjusted gross income
  • health insurance if an individual has been receiving unemployment compensation for more than 12 weeks
  • qualified higher education expenses
  • qualified first-time homebuyer expenses (up to $10,000 and haven't owned a home in the last couple of years)
  • conversion of Traditional IRA assets to a Roth IRA
  • distributions due to IRS levy
Otherwise, you owe the penalty if you are less than 59 and a half years old.
Hmmm, it could be where I am disabled. I will know more next week though, if I find out otherwise I will post on how they do it.
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Old 08-13-2007, 08:57 AM   #18
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Martha you are right, it is where I am disabled, they emailed me back today.
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