Retirement for Seniors

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The Truth About Tapping into Your IRA before Retirement

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Almost all Americans are entitled to open an Individual Retirement Account, or IRA. These tax-advantaged accounts are a solid supplement to any retirement nest egg, if you already have a 401(k) or other retirement assets; or, if you begin early and make the maximum contribution every year, an IRA can grow to become your primary source of retirement income.

Briefly, almost anyone can open a traditional IRA, provided you have taxable income and are under 70½ years of age. Contributions are tax deductible provided you meet income limits, and depending on whether or not you have a retirement plan at your place of work. Your regular IRA grows tax-free from year to year, and when you are ready to start withdrawing funds in retirement, you pay tax on your withdrawals as regular income. Roth IRAs, on the other hand, are available only to people who meet specified income limits, which are adjusted from year to year. Contributions are not tax-deductible, but, as with regular IRAs, Roth accounts grow tax-free. And all withdrawals in retirement are entirely tax-free as well. So, with a regular IRA, you get a tax benefit up-front; with a Roth IRA, the tax benefit comes later. For most people, a Roth IRA is more favorable.

Because IRAs are tax-advantaged, the IRS places limits on how much you can contribute each year. For tax year 2012, the maximum annual contribution for an individual under the age of 50 is $5,000; for those 50 and older, the maximum contribution is $6,000. Note that you can’t contribute more than your taxable income for the year; if you earn only $3,500 during 2012, that will also be the limit of your IRA contribution for that year.

IRA before Retirement

IRA Contribution


Because IRAs are intended to provide income for your retirement, you should avoid tapping into them before then. However, sometimes emergencies arise, and we may not have a source of cash elsewhere. Can we withdraw IRA funds before retirement?

The short answer is yes, but there are ramifications. If you withdraw money from a regular IRA for which your contributions were tax-deductible, you will pay income tax on your withdrawal, as though the amount of the withdrawal were regular income. Also, you will pay an early withdrawal penalty of 10 percent of the amount of the withdrawal. The penalty applies to both regular and Roth IRAs. Given this prohibitive penalty, it’s best to find other sources of cash if at all possible.

However, in some circumstances, you can make withdrawals without paying the penalty. For instance, if you use the withdrawal to pay college expenses for you, your spouse, or your children or grandchildren; to pay for medical expenses greater than 7.5 percent of your adjusted gross income; to pay for a first-time home purchase (up to $10,000); or to pay for the costs of a sudden disability, then no penalty is due. Can you buy a second home with IRA money preretirement? Yes, but you’ll get socked for the 10 percent penalty. Find the money somewhere else.

Additionally, there are more esoteric withdrawal possibilities. You can withdraw funds, preretirement, over time, via “substantially equal periodic payments.” At your request, the IRS will determine what amount you can receive each year, based on your life expectancy. Once this has been determined, you MUST withdraw this amount each year, for five years or until you turn 59½, whichever comes sooner. If you stop your withdrawals prior to that, you’ll get hit with the 10 percent penalty, applied retroactively, on the withdrawals you’ve made to date. And five years of withdrawals, in amounts established by the IRS, will eat into your retirement savings. So, again, try to find other sources of cash!

The money you contribute to your IRA is your money, and eventually you will get the full benefit of it. However, because the IRS offers substantial tax benefits to those who invest in IRAs, the IRS can likewise place limits on contributions as well as withdrawals. The rules and amounts are adjusted on an annual basis, so be sure to check carefully before making any move. Generally, it’s best to invest the biggest possible amount each year, and to not make withdrawals until you reach your retirement age.

IRA Calculator

IRA Calculator will help you determine:

IRA calculator helps you decide whether a Traditional or Roth IRA is best suited for your needs.

How much you need to withdraw each month once you retire to live comfortably
How much you need to contribute each month to maximize employer contribution for monthly retirement withdrawal goal
How you can forecast for your contributions’ affect on your retirement savings can be done through our online 401-K calculator.


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