early withdraw question

[digoyal]

Hi,

If I start a early withdraw from my IRA account using the amortization method, can I also make another withdrawal from the same account by paying 10% penalty on it.

So suppose my regular fixed withdrawal is $100,000.
But I also make another $50,000 withdrawal, and pay $5000 penalty.

Would this be allowed?

Thanks
-- dinesh

[Leonidas]

Are you talking about making early withdrawals using 72(t)?

If so, the answer is yes you can, but then the IRS will come back and hit you with a 10% penalty. The penalty is applied not just to the excess withdrawals, but on all amounts withdrawn. The key phrase to remember regarding the 72(t) exception to the 10% penalty is SEPP - "substantially equal periodic payments". If you take out an extra $50K one year, the substantially equal concept is no longer in effect. So, if you were in year two of the SEPP and had been withdrawing $100,000 annually and then made the $50,000 "extra withdrawal that broke the SEPP, you would owe 10% penalty on $250,000, plus interest.

[d]

Quote:

you would owe 10% penalty on $250,000, plus interest.

wow, that's a bummer! and a clear caution that some good planning is in order if one plays with early withdrawals. however, if the "extra" is from a seperate IRA ... but don't take my word for it.

[digoyal]

Thanks for the quick response. A related question is what interest rate can be used for the "amorization" method? The official line is that it's "120% of the long term federal rate". But I read somewhere that it doesn't have to this. For example, if your account is invested in a mutual fund which is giving you 15% for the x number of years, you could use this number in the calculation.

What if you're doing your own investing? Can you use your yearly average return?

- dinesh

[frayne]

This may be of some help.

http://www.lpl.com/calculators/Retire72T.html

Reasonable interest rate
This is any rate less than or equal to 120% of the Federal Mid-Term rate for either of the two months immediately preceding the month in which the distribution begins. Click here for more information.. For April 2006, 120% of the Federal Mid-Term rate is 5.68%.
It is important to note that the associated law that created 72(t) distributions did not define what was to be considered a reasonable interest rate. As such, the guidance from the IRS generally flows from the concept that they will not allow people to circumvent the requirement of substantially equal periodic payments (SEPP) throughout your lifetime by using an unreasonably high interest rate.

72(t) withdrawals setup prior to January, 2003, had some flexibility in the choice of the reasonable rate to use. However, in 2002, the IRS issued new rules stating that only rates less than or equal to 120% of the Federal Mid-Term rate would be considered reasonable. You are now required to use a rate that less than or equal to 120% of the Federal Mid-Term rate.

[albundyz]

One of my friends told me that he got two IRAs instead of one. When I asked him 'why', he said that one IRA was set up specifically for his 72T and one was just a normal IRA. I did not really understand why he did this, but after doing some research I found out. If you have an emergency and you need some extra money you can leave the 72T IRA untouched and take the emergency distribution from the second IRA.

I don't know of any way to avoid the 10% penalty on the emergency distribution, but you would leave the 72T IRA untouched and unbroken.

Avoid breaking that 72T IRA..

[Leonidas]

Don't mistake me for a tax professional, but I think d and albundyz are correct.

If you want to do a SEPP using the 72(t) exception, and have the ability to make some emergency withdrawals you could do that with two seperate IRAs. The seperate accounts should be set up before setting up the SEPP. Make sure that the custodian understands that you want the 1099-R 's for distributions made from the IRA you designated as funding the SEPP to show show code 2 in Box 7. Each year of the SEPP you will get a 1099R with code 2 designating an exception, and you will have to complete form 5329 and submit it with your tax return. If you take an early distribution from the other IRA account while still doing the SEPP in the first IRA account, you should get a second 1099R. The 1099R for the early distribution from the non-SEPP IRA account should show code 1 in box 7 and you will owe the additional tax and excise. I don't think you have to do a second foprm 5329, but you better go to the IRS site and read the instructions rather than take my word for it.

Once again, a word or warning - don't take extra distributions from an IRA that is part of the SEPP plan or it will cost you a lot of money.