I don’t like to write US-centric blogs (about 40% of my readers are outside the US), but I have been reading lately in newspapers and internet articles about older US workers (50 or older) who have lost their jobs and need to take money out of their traditional IRAs just to be able to pay their living expenses (to pay their mortgage, buy food, support their families). They are having to pay a 10% penalty fee for making an early withdrawal before reaching 59½ years of age. Many of these articles talk about the problem but will not tell you the methods you can use to withdraw the money from your traditional IRA without incurring the penalty fees. The following are some methods to get around the early withdrawal penalty:
• You can withdraw money toward qualifying school cost. For example, you need to go back to school to increase your job skills or your child is in college. You could use your traditional IRAs to pay for the school expense and use non-IRA money for your living expenses.
• There are a number of hardship cases for penalty-free early withdrawals from your traditional IRA, for example:
◦ Total and permanent disability
◦ Payment of medical insurance while unemployed
◦ Medical expenses that exceed 7.5% of adjusted gross income
For example, you could use your traditional IRAs to pay for your medical insurance payments and your non-IRA money for your living expenses.
• The IRS has a rule called 72T. Using rule 72T eliminates the 10% early withdrawal penalty for traditional IRAs. The withdrawal must continue until the age of 59 ½ has been reached or for a minimum of 5 years, whichever comes last. For example, by using a 72T calculator (http://www.dinkytown.net/java/Retire72T.html) you can see that if you are single, 56 year old and have $500,000 in your traditional IRA using the fixed amortization method your yearly payout would be $25,168 (monthly payout of $2,097).
Please consult with your tax advisor or the IRS before deciding on what is the best method for you so you won’t have to pay the 10% early withdrawal penalty. You will still need to pay income tax on the withdrawn money. The major drawback is you are depleting your retirement accounts and will have less money for when you retire.
Paul’s Gang financial and investment definitions:
Quality of Profit: High quality of profit means a company is increasing profits by increasing revenue (sales) and controlling cost. Low quality of profit means a company is increasing profit only by decreasing cost and not by increasing revenue. Methods of decreasing cost include decreasing labor cost (reducing the labor force), capital cost, Research and Development (R&D), etc.
Company worth more in its parts than the whole: If a company sold its parts (business units) it would be worth more than its market capitalization. For example, if a company has one business unit that is losing money, possesses high liabilities, has slow growth (compared to the overall company), etc., it could be decreasing the stock price of the company (which would decrease the market capitalization). The company could sell the business unit and increase the stock price and market capitalization. Another example could be that the company has a very profitable and fast growing business unit as compared with the rest of company; that business unit may be worth more than the original company market capitalization. The company could sell the business unit or could do an Initial Public Offering (IPO) to create a new company separate from the business unit.
Arrow in my Quiver: When you find a high quality investment opportunity, stock, ETF, etc. but the micro and/or macro economic factors are not favorable to the investment, you put the investment into your quiver waiting for the right economic environment. When economic factors change you check your quiver to see if you have any investments that are favorable to the new economic environment. If they are you pull the arrow from your quiver and make the investment.
In closing, Paul’s Gang recommends the following financial and investment books. If you are interested, click on the link to get a review of the books from the Amazon website:
The Ascent of Money: A Financial History of the World
The Big Short: Inside the Doomsday Machine
Common Stocks and Uncommon Profits and Other Writings (Wiley Investment Classics)
Die Broke: A Radical Four-Part Financial Plan
The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
The Intelligent Investor: The Classic Text on Value Investing
The Millionaire Mind
One Up On Wall Street : How To Use What You Already Know To Make Money In The Market
Security Analysis: The Classic 1934 Edition
Please chime in with comments about early traditional IRA withdraws, what are your favor financial and investment books, future blog ides, etc.
© 2010 Paul Cusick
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Which one of the book you listed was the best read. Which one did you like the best.
ReplyDeleteOn the topic of retirement accounts the mass of baby boomers 75Million+ are nearing the point of leaving the job market. By choice or not many have seen there retirement account shrink and with current cheap money will not be able to generate cash flow with these interest rates.
If our economy is having problem with the 22 million unemployed counted or not. what effect will 75+ million additional people with no cash flow have on the economy or market value since the only way of getting cash would be to sell assets.