Financial Experts Warn Against Tapping Retirement Assets Early
December 09, 2008
The historic loss in jobs over the last 90 days has had an unfortunate impact for thousands (and perhaps millions) of Americans who have been forced to withdraw funds from their Individual Retirement Accounts (IRA) in order to make ends meet. While in some cases the withdrawals may be unavoidable, financial experts across the country have been advising that IRA accounts should be one of the last places to go for funds for the following reasons:
(1) Distributions are taxed at ordinary Federal and State income tax rates
(2) For accountholders under the age of 59 1/2 a 10% penalty applies
(3) With stock market indexes down over 40% for the year - the market timing is less than ideal for selling - and capital gain losses cannot be carried over on IRA accounts
(4) The prime lending rate is at a very low 4% making many conventional loans more affordable
Americans who have no where else to go for funds do have the option of taking out a loan from their IRA account as long as the funds go back into the IRA or a different IRA in 60 days. The consensus amongst tax planners for those considering this type of short-term IRA loan has been to wait to make the transfer until after January 1, 2009, so that any part of the loan that is not ultimately put back into an IRA within 60 days will not be taxable until 2010.
The tax code does provide a way to avoid the 10% penalty for early withdrawals. In Section 72(t) of the Internal Revenue Code the law states that if you elect to receive "a series of substantially equal periodic payments" that are based on your life expectancy then the taxpayer will not have to pay the extra 10%. However the major problem with Section 72 withdrawals are that they only allow a small percentage (2% to 3% depending upon your age) of the the total assets in the IRA to be withdrawn in a year. The IRA account would have to hold significant assets to benefit the taxpayer in the current year with their withdrawal.
More information about the IRA withdrawal rules are available at IRS.gov.