||Ask the Dollar Diva
How can I draw retirement income
early from my IRA or 401(k)?
Dear Dollar Diva,
My company is entering a merger, and I will be taking an early retirement
package that will give me about 56 percent of my current income.
I will be 56 years old when the merger is finalized. If I find myself
short of cash and need to tap my IRA or 401(k), what is the penalty
and how can I minimize it? Are there institutions that will make
short-term loans against the value of my IRA or 401(k)?
Congratulations on your early retirement. Life can
be a bowl of cherries when you buy your soul back from the company
store; but it can be the pits if you can't afford to maintain your
lifestyle. Don't rule out working on something that would be fun.
Combine the tight labor market with your retirement income, and
the Diva sees you sitting in the driver's seat. Read "Working
after retirement" and AARP's "Working options: a
guide for mid-life and older workers" for some ideas.
Tapping into your IRA
Here's the bad news: When you withdraw money from
an IRA before you're 59-1/2 you almost always have to pay an additional
10 percent tax on the early withdrawal.
Here's the good news: You are a perfect candidate
for an exception that exists within the IRA rules: the annuity payout.
You can be any age to use this method, but it's tailor-made for
someone in your position. The Diva will give you a summary of the
rules. For the nitty gritty go to the IRS Publication 590, Individual
Retirement Arrangements (IRAs).
- You can receive distributions from your IRA
if you take them as a series of equal payments over your life
- The payment schedule has to be one the IRS
- You must take at least one distribution annually.
- The payments must continue for at least five
years or until you reach age 59-1/2, whichever is the longer period
(in your case five years, until you are 61 years old).
- After the five years, you can do whatever
you what: increase, decrease, or stop the payments.
- The payment plan you set up is written in
stone -- in your case for five years. If you change it -- perhaps
by taking an additional lump sum -- say hello to a 10 percent
penalty for not only the lump sum but all prior distributions
Tapping into your 401(k)
Normally, you'd expect to pay a 10 percent penalty
on 401(k) distributions, but you've lucked out with another exception.
If you take money from your 401(k) plan after your separation from
service, the magic age is 55 for not having to pay the extra 10
Publication 575, Pension and Annuity Income will give you the
scoop on this one.
IRA or 401(k) as collateral for loan
Don't even think about it. Using an IRA or 401(k)
for collateral is called a "prohibited transaction," and it's goodbye
collateral, hello taxable distribution.