Dear Tax Talk,

Nine months before my husband’s IRA is available, we are starving. His part-time job and my business aren’t making it. The total we bring home is less than $1,800, and our rent is $1,300.

We have a car plus a personal loan payment of $331 per month, then the rest of the bills. I want my husband to live to see his IRA and I want us to live through this. My thoughts are to withdraw $30,000 out of the IRA and then we could live like humans for the next nine months. I know there will be taxes, but what about the interest on the balances and the stress of not being able to pay our bills?

We are somewhat frugal people, but we need some help handling this mountain. My husband’s good credit is now poor, if not bad. Mine is bad. He is paying the minimum or missing one. Our rent had been late each and every month for over a year; it has been on time for the last four months, but we have all but sold our souls to make that happen. I don’t know what will happen for rent in eight days. There is almost $500,000 in the IRA, and we are living on less than welfare. Even if it may be possible for us to qualify for public assistance, I would prefer not. Is there any other way?

— Gail

Dear Gail,

You can always withdraw early from an IRA, but are subject to a 10 percent penalty. There are numerous exceptions to the early withdrawal penalty. 

First, you can elect to begin taking distributions annually over his life expectancy, which at age 58 is 27 years. With a balance of $500,000, you can free up around $19,000 penalty-free. If your situation gets better, you’ll unfortunately have to continue making the withdrawals.

If you have any higher education expenses, withdrawals are penalty-free. You can try to buy a home and get out from the rental situation (although you need good credit to qualify for a mortgage). A withdrawal of up to $10,000 for a first-time home purchase is penalty-free.

A little more complicated planning may involve turning that IRA balance into a qualified retirement plan. If you own your business, you could incorporate and set up a retirement plan that allows employees such as your husband to roll in IRA money.

Once the money is in the qualified plan, you can borrow $50,000, free of the penalty and income tax. While this is a little more sophisticated, if you can accomplish this yourself, you can do it with little cost. You can even get a tax credit for half of the cost of setting up the retirement plan by filling out Form 8881.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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