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Dear Dr. Don,
I'm 50 and am worried that the $500,000 in my IRA account will be lost due to my stock broker's bankruptcy. How can I do an early withdrawal under the "substantially equal periodic payments" rule?
-- David Denouement
Dear David,
You have the ability to withdraw monies out of
your IRA account prior to age 59½ without paying
the 10 percent penalty tax by making substantially
equal periodic payments, or SEPP, under Internal
Revenue Code section 72(t).
However, I'd suggest that you pursue
other options first. If your broker is bankrupt,
figuring out how to take out money as an annuity
over many years really isn't an attractive solution.
First, look into whether your brokerage
account has Securities Investor Protection Corp.
coverage. The SIPC's brochure, "How
SIPC Protects You," explains its role:
"When a brokerage is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and, within certain limits, works to return customers' cash, stock and other securities."
The SIPC doesn't protect you from
bad advice or fraud, but is set up to protect
you when your broker is in bankruptcy. If your
broker participated in the SIPC, your account
should be covered up to up to a ceiling of $500,000
per customer, including a maximum of $100,000
for cash claims.
If you have access to the account,
move it to another custodian. You can do a trustee-trustee
transfer, or by making a rollover contribution
within 60 days to the new account. IRS Publication
590, "Individual
Retirement Arrangements," has more information
in the section, "Can You Move Retirement Plan
Assets?"
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