Tapping IRA early a bad option

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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 59 ½ 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’s 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?” for more information.