Individual Retirement Accounts (IRAs) are used by many people to save for retirement because of the benefits of contributing to IRAs while you are working. However, if you want to access the money in your IRA before age 59 ½, you may owe taxes on the withdrawal, in addition to the hefty 10 percent penalty for early withdrawals.
However, a Maryland tax attorney can help you determine if you can use one or more exceptions to withdraw money from your IRA at any age without paying a substantial penalty fee. Sometimes, you can withdraw funds without incurring tax liability too.
Withdrawing Money from Roth IRAs
Usually withdrawing funds from a Roth IRA before age 59 ½ results in a 10 percent penalty and taxes. In addition, you must have also had the account open for at least five years before the withdrawal, even if you are over the required age to avoid penalties and taxes.
However, you can withdraw the “basis” in your Roth IRA at any age without penalty or taxes. Your basis is the money you contributed to the Roth IRA or converted into the Roth IRA. Therefore, as long as you withdraw no amount over your contributions to the Roth IRA, you should not owe a penalty or taxes.
Reducing a Traditional IRA Balance to Its Basis
When you make nondeductible contributions to your traditional IRA, the pro-rata allocation rule applies to future withdrawals. If you withdraw funds from your account, the distribution will include a taxable and a nontaxable amount. However, if you roll over the taxable portion of your traditional IRA to a qualified retirement plan, such as your employer’s 401(k) account, you reduce the IRA to your basis. Once the IRA is reducedto its basis, you can liquidate the IRA without penalty or taxes.
Substantially Equal Periodic Payment Exception
This exemptionallows a person to generate a steady stream of income from their traditional IRA with no penalties, regardless of the person’s age. However, there area few requirements for this exception to apply.
One requirement states that the payments must continue until you reach 59 ½ years of age or for five years, whichever date is later. Another requirement is that you must choose one of the three approved methods to calculate your substantially equal periodic payments. The three approved methods are the required minimum distribution method, the annuitizationmethod, and the amortization method. If you do not want to use one of these methods to calculate your distributions, you may request approval from the IRS to use another method to calculate the payments. Besides these requirements, you could also have other requirements that must be followed to ensure you are not penalizedfor early distributions.
Errors in utilizing substantially equal periodic payments to obtain your IRA funds before 59 ½ years of age without penalty can be expensive. For example, if you modify the payment plan before the term for the payment plan expires, the exception for substantially equal periodic payments is revoked retroactively. In other words, you owe the 10 percent penalty on all distributions before age 59 ½, including interest on the distributions.
Consult a Maryland Tax Attorney for More Information About Early IRA Withdrawals
Because some methods used to withdraw funds from an IRA have several requirements and mistakes can be costly, consult with a Maryland tax attorney to discuss early withdrawals from an IRA. Contact Maryland tax attorney Steve Thienel to determine your options. Maryland tax attorney Steve Thienel is dedicated to assisting clients in Maryland, Virginia, and throughout the DC Metro area and can provide trusted guidance and legal counsel regarding all tax issues you may face.