Why consider any of these? Well, in the words of Ecclesiastes 9:11, “Time and unpredictable events overtake all.” Consequently, waiting on your IRA to ripen (or over-ripen) may not be in your interest at all when other things are available to you.
Here’s Idea #1. You don’t have to wait to start using your IRA.
At the very least, if you’re concerned about running out of money to pay for healthcare, go price Long Term Care insurance, and use IRA money to pay the premium; in the back of your mind, it’s what you’re saving your IRA for, right?
Once you’ve got that resolved, it’s time to wake up and smell the roses beyond Gibbs Gardens, maybe even explore the tulip gardens in Holland, courtesy of what’s still in your IRA.
Why? Because you’ll end up with too much left in your IRA if you only take the Required Minimum Distribution (“R.M.D.” below) each year.
This shocker is courtesy of IRS’ Uniform Lifetime Table, which dictates the amount your R.M.D. must be each year. No mysteries here; it’s 7th grade math. You divide your IRA balance by that Table’s number for your age. So at 70½, for example, you divide your IRA balance by 27.4. The result is your R.M.D. for that year.
Here’s the catch. You’d assume that if you’re 70 1/2, and IRS’ table says you have 27.4 years to go, your IRA should be empty when you’re 98.
Nope. It doesn’t happen that way. IRS’ Table is skewed. If you’re only pulling the R.M.D. out each year, you’ll have to live until age 115 to get everything out of your IRA.
Sounds innocent, right? But consider: at age 90, what are you going to do with the money still in your IRA? What about at age 100?
Unless you’ve made it onto one of those Smuckers jam bottles in the Today Show commercials, you’ll probably be unable to do anything fun with the money . . . money which is still being forced out of your IRA, year by year, as you drift towards your second century.
Idea #2: take money from your IRA before you’re age 59½ without the 10% penalty for early withdrawals.
This isn’t a gimmick or new strategy someone just thought up. It’s right out of the Internal Revenue Code’s Section 72(t).
So want to start drawing down your IRA before 59½? You can, subject, of course to rules.
You can’t draw money down just once. If you do this, you’ll have to take out at least one payment a year for either five years, or until you reach age 59½, whichever is longer. Example: if you want to start taking money at age 56, you’ll have to take that same amount out until you’re age 61.
Miss a withdrawal, or withdraw the wrong amount and you’re subject to the 10% penalty. So be careful.
And how much can you take out? IRS has three tests to determine that. Luckily, you don’t have to run them. On-screen calculators are on the Internet so you can find out which test works best for you. Just Google “72(t) calculator.” Insert a few numbers and you’ll find out what you can take out under the most desirable test.
An example: Someone is 50, has $500,000 in an IRA which earns around 5% a year. Under Section 72(t), he or she can start taking out $30,807 a year, through the year when he or she reaches age 59½. Not bad, huh?
Here’s Idea #3: you can tap into your IRA for qualified school expenses. These can be expenses for yourself, your spouse, your children or your grandchildren. Ask if you’re curious about what makes an expense “qualified.”
Idea #4: Buying a first house? If you’re heading towards your first house, you can take up to $10,000 from your IRA (or if you’re married, $10,000 each) to put towards a new house.
And finally, Idea #5: if you’re forced to take a R.M.D. from your IRA and you don’t need all of it, there’s an annuity you should consider. Not all annuities are anathema and in this context, you can exempt up to 25% of IRA assets (to a max of $125,000) from the annual distribution requirements.
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Granted, these five techniques are not for everybody, and what’s above is general information to introduce new possibilities to you. The bottom line, though: you don’t have to be a prisoner of waiting for age 70½.