LegalJourney Blog

Thursday, July 21, 2016

Evaluating Alternative Retirement Withdrawal Strategies

What are the best strategies to use for withdrawing money from retirement accounts?

In the present economic environment it is not uncommon for an employee to lose a job at age 55 or older or to be forced into early retirement. According to AARP, the most recent unemployment rate for workers 55 and older is approximately 4.7 percent. Even though this is somewhat lower than the unemployment rate for the general population (which is nearly 5 percent), the average length of unemployment for older workers is a bit over 51 weeks, about one-and-a-half times longer than for people under 55.

For those unemployed or starting early retirement, the question becomes: What is the best method to withdraw funds in order to fill in the gap left by loss of salary? On the plus side, many employees have substantial savings in their 401(k) plans or IRAs on which they may draw. Nonetheless, the withdrawal methods used can make a big difference in financial security.

Tax Problems that Affect Withdrawal from Retirement Accounts

The concept of the retirement account is that no taxes are paid on the money that goes in to build up the next egg. Therefore, taxes will be paid on those funds at the time of retirement, when, theoretically, the former employee will be in a lower tax bracket. The problem is, however, that as an early retiree you may be confronted by penalties, taxes and complications when withdrawing funds. The good news is that thoughtful planning with a knowledgeable estate planning attorney can reduce or even eliminate such costs.

Withdrawal Strategies

Being aware of, and using, the appropriate withdrawal strategies can make a tremendous difference. For example, if you are 55 or older and have stopped working when you tap into your tax-sheltered retirement accounts, you can withdraw funds from your 401(k) plan or 403(b) account without being subjected to the 10 percent penalty that would usually apply to withdrawals from the IRA of an individual under the age of 59½. Even so, the funds you withdraw will still be subject to taxation.

It is important to realize, however, that an individual of any age can make withdrawals from a Roth IRA at any time without being subject to penalty or tax. This is because the contributions you've made to a Roth IRA, unlike those made to a traditional IRA, have been made with post-tax dollars.

Even if you have a traditional IRA, you may qualify for an exemption from the 10 percent early withdrawal penalty if you have become disabled and your physical or mental disability prevents you from continuing to engage in gainful employment.

Qualifying Expenses for Early IRA Withdrawals without Penalty

Another relevant factor in withdrawing funds from your IRA before you reach the age of 59½ is whether

you have any expenses that qualify you to avoid the penalty. Such expenses include:

  • Higher education expenses
  • Out-of-pocket medical bills
  • High health insurance premiums if you are unemployed

SEPP Withdrawals

There is also another strategy that can be used to make withdrawals from your IRA account while you are still under the age of 59½ without being charged a penalty. This option, called a SEPP (substantially equal periodic payment) withdrawal allows you to take periodic payments of similar amounts over a 5-year period or until you reach 59½, whichever happens later.

By following the required schedule you save the 10 percent penalty. As a matter of fact, putting your IRA in "payout status" by beginning to withdraw from it periodically may keep it from counting as an available asset for purposes of Medicaid eligibility, helping in your plans for long-term care. The catch is that if you fail to meet the required schedule all your withdrawals are subject to the penalty retroactively.

Clearly, the laws governing retirement account withdrawals are complex. When considering making such withdrawals it is essential that you work closely with a highly qualified attorney who has extensive experience in both estate planning and elder law.


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Attorney Karnardo Garnett represents clients with their Estate Planning, Elder Law and Asset Protection needs throughout the Tampa Bay Area, serving all of the bay area, including but not limited to Tampa, Brandon, Clearwater, St. Petersburg, Gibsonton, Riverview, Oldsmar, Safety Harbor, Hillsborough County, and Pinellas County, FL



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