Market Beat: Annuitizing your IRA
August 11, 2014
IRA accounts carry a stiff penalty for early withdrawals. If you take a distribution before you reach the ripe old age of 59 and a half, it is subject to a 10 percent penalty plus income tax, unless special circumstances apply like death, disability, medical expenses greater than 7.5 percent of your AGI, or annuitization.
The term "annuitization" doesn't mean that you must purchase an annuity contract from an insurance company. It means that you must withdraw your funds in "substantially equal periodic payments," known as SEPPs, based on your life expectancy.
If you're thinking about retiring early, before age 59 and a half, you can tap into your IRA account. When you leave your job, you can roll funds from your 401k account into a rollover IRA. I have personally seen clients who have changed jobs multiple times over their careers, have their retirement funds spread around with multiple custodians and are paying some very high fees.
By consolidating those funds into an IRA, you'll have more investment choices, better control, and, in the unfortunate event of your untimely demise, it will be a much easier situation for your beneficiaries to deal with. Then you may take distributions from your IRA without penalty for retirement purposes.
Once the distributions have started, you must continue the withdrawals for at least a five year period or until you reach the age of 59 ½ or you could get penalized. Distributions have to be taken once per year at a minimum.
There are three different ways to calculate your distribution amount — the required minimum distribution method, the fixed amortization method and the fixed annuitization method. The required minimum distribution method is the simplest, but usually also results in the lowest payment.
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The fixed amortization method amortizes your account balance over your life expectancy. The fixed annuitization method uses an annuity factor and is a fairly complicated calculation. You are allowed to make a one-time change from the annuitized or amortized methods to the required minimum distribution method.
Life expectancy can also be determined using three different methods. The options are a uniform lifetime table, a single life expectancy table and a joint life expectancy table. Using the single life expectancy table will result in the highest payment amount if you need the additional income. Taking early distributions is a decision that requires some careful analysis.
I am not a tax adviser, so you should consult your own tax attorney or CPA for advice on your personal situation.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.