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Before you decide to use the periodic payment exception to make early IRA withdrawals, consider your needs, the alternatives, and the tax implications.
Consider that the size of your periodic payments may be relatively small -- unless you have a substantial IRA balance. That’s because payments are calculated based on your life expectancy, and while you’re under age 59½ your life expectancy is still relatively long.
Therefore, if you need more than small amounts of money doled out regularly the payments may not be enough to meet your needs.
If you need the money because you’re taking early retirement, consider that you may decide to return to the workforce and no longer need the regular income. Or if you’re still relatively young or you only need money for a one-time expense, consider postponing your needs until you reach age 59½, especially if that’s not too far off.
If that’s not a possibility, consider making a single early withdrawal, paying the 10% tax, and leaving the rest of your IRA intact to grow tax deferred.
Consider other sources of money, too. For instance, if you’re leaving your job in the year you reach age 55 or later and you have a 401(k) plan, you can tap into it without incurring an early-withdrawal penalty.
There are pros and cons to each distribution method, so get all the details and if necessary, consult a financial or tax advisor experienced in IRA distributions, especially if your IRA balance is substantial.
Note that when you take payments, you -- not your IRA custodian, are responsible for making sure you take the right amount each year. So make sure to keep the documentation that shows how you calculated payments.
The payment method that’s appropriate for you depends in part on if you want to minimize or maximize the size of your payments. Although you may initially consider a method that calculates larger payments, you’ll deplete your IRA more quickly and lose the benefit of future tax-deferred growth.
And if it turns out that you don’t need the larger payments, you cannot put your withdrawals back into your IRA or roll them over to an IRA or other retirement plan.
When deciding on a payment method, remember to consider the impact of income taxes. Although you avoid the 10% additional tax when you take periodic payments, you still have to pay ordinary income tax on the taxable portion of each withdrawal. And the larger your payments, the more income tax you’ll owe. Plus, you may have to pay estimated income tax on the payments.
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.
Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (800) 369-2862. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America. The Representative may also be a credit union employee that accepts deposits on behalf of the financial institution.
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