If you've been socking away money into
a regular individual retirement account, you're probably
staring at a sizable stash. Which leads to a very important
question: When can you get your hands on it?
The short answer is: Whenever you want.
The smart answer is: Hold off as long as you can.
There are two critical ages with a regular IRA. At 59½,
the government allows account owners to make withdrawals without
penalties. You can take as much or as little as you like -- whenever
you like. At the end of the year, you simply pay income tax on the
money you withdrew.
At the age of 70½ (defined in government
speak as "the April 1 following the year you turn
70½"), you must start taking money out of
your regular IRA. That's because the government doesn't
get its money -- income tax -- until you make withdrawals
from your account, and it wants to give you plenty of
time to spend every dime.
If you have a Roth IRA -- in which the tax was paid before the
money went into the account -- no such rules apply. You can keep
building a Roth for as long as you like.
Many people don't realize that the government also will allow you
to take money out of a regular IRA without penalty before the magic
age of 59½. There are about a dozen reasons that the government
will let you access the money, such as disability, higher education
expenses and first-time homeownership. The bad news: The rules are
very rigid. You must carefully document your reasons for early withdrawal
or face hefty IRS penalties.
You also can take the money out early
without having to meet one of the exception circumstances
as long as you take it out in regular amounts. This
is known as the substantially equal periodic payment
method. Once you start withdrawing using this method,
which is based on IRS-established life-expectancy tables,
you must continue taking them for at least five years
even if you reach 59½ in the interim.
But probably the greatest risk is that the earlier you start dipping
into an IRA, the greater the risk of outliving it.
RULE 1: At any age, before you set up a plan to take money out
of your IRA, do your homework. Unless you've got some major financial
know-how, this is not the time to go it alone. Get a trained financial
planner and a tax specialist to walk you through the pros and cons.
Make sure you feel comfortable with the advice and get a second
opinion, if you can.
Look at the long term. People are living longer, healthier
lives. But the cost of health care and elder care has
skyrocketed. If you tap into the IRA now, are you going
to be broke when you reach your 80s or 90s?
This magic moment -- 70½
If you're nearing 70½, the government has some
good news for you. While you are required to start taking
regular disbursements from your regular IRA account,
the IRS has made the rules a lot simpler. The agency
modified its life-expectancy tables to reflect longer
lifespans. That means the required disbursement, the
amount the government says you have to withdraw each
year, is smaller.
If you take only this minimum amount every year, it will be nearly
impossible to outlive your retirement account. You do have, however,
the freedom to take more out if you like.
"This changes it for the better for everyone," says Barry
Picker, CPA, certified financial planner and the author of "Barry
Picker's Guide to Retirement Distribution Planning." And by
taking minimum disbursements, he says, "you can never run out
unless your investments are so bad that the account drops under
the minimum distribution."
Updated: Jan. 23 , 2006