Q: My 78-year-old mother has run into serious financial hardship. Her expenses are exceeding her Social Security by more than 50 percent. She does have a small IRA with $45,000 in her portfolio. Can she liquidate the entire amount to pay off debt and medical expenses, and if so what implications does she face?
A: As you say, your mother's situation sounds serious, and regardless of what she does with her IRA retirement savings, there are some fundamental decisions you and she are going to have to make about budgets and living arrangements. Addressing a few aspects of your question about IRA distributions might help shape your decisions about how to proceed next.
Tax implications for retirement savings
Obviously, your mother is well past age 59 1/2, which is the age at which one can start taking money out of an IRA without penalty. This means there is only the question of whether she would face ordinary income tax on withdrawals. That depends on whether it is a Roth or a traditional IRA.
Taxes on Roth IRA vs. traditional IRA
If it is a Roth IRA, there should be no income tax on the withdrawals, while if it is a traditional IRA withdrawals would be subject to income tax. However, from what you describe, it is entirely possible your mother's medical expenses could offset the tax liability.
It should also be mentioned that if it is a traditional IRA, your mother should have been taking annual required minimum distributions from the age of 70 1/2 onward. If she has not been doing so, you should contact the IRS to see what penalties she may face.
In any case, the bottom line is that if this is a Roth IRA, the entire amount should be available to put toward your mother's expenses. If it is a traditional IRA, there may be some tax implications that would reduce the amount.
Money in retirement plans is often protected from creditors. Since this is the case, before your mother takes the full amount out of the IRA, you and she should think about whether it might be advantageous to take the money out in increments while leaving most of it protected. It is possible this could give you some leverage in negotiating with creditors.
Even if you wipe out the debt, from what you describe your mother's living arrangements will be more than she can afford. It won't be easy, but you should help her consider alternatives that would drastically reduce her budget to a level that is within her means.
Given what appears to be an unsustainable financial situation, I would urge you to contact your local county office to see what resources they have for seniors. Often, they will be able to point you towards social services that can identify less expensive living arrangements and/or sources of aid that may be available to your mother.