GPT on Question 50, Sep 26

If you withdraw $60,000 from a traditional IRA at age 55, assuming it is all pre-tax:

• •Early-withdrawal penalty: generally 10% = $6,000
• •Federal income tax: the $60,000 is added to your taxable income and taxed at your marginal rate
• •State income tax/penalty: may also apply

For example, at a 22% federal marginal rate, federal tax plus penalty could be about $19,200 ($13,200 tax + $6,000 penalty), before state taxes. If you need $60,000 net, you may need to withdraw substantially more.

Important: The “Rule of 55” does not normally apply to IRAs

That rule applies to certain employer plans—such as the 401(k) of an employer you leave during or after the calendar year you turn 55—not to a traditional IRA.

Ways the 10% penalty might be avoided

• 1.Wait until age 59½.
• 2.Qualify for an IRA exception, such as:
• •Permanent disability
• •Certain medical expenses above 7.5% of AGI
• •Health-insurance premiums while unemployed
• •Qualified higher-education expenses
• •Up to $10,000 lifetime for a first home
• •Certain birth/adoption, terminal-illness, disaster, domestic-abuse, or emergency distributions
• •IRS levy

Ordinary debt repayment is not an exception.

• 3.Use substantially equal periodic payments under Rule 72(t). These avoid the penalty but require a prescribed withdrawal schedule lasting at least five years or until age 59½, whichever is longer. Changing the schedule can trigger retroactive penalties.
• 4.Potential workplace-plan strategy: If your employer plan accepts IRA rollovers, and you later separate from that employer under the Rule of 55, qualifying withdrawals from that plan may avoid the penalty. This is plan-specific and should be reviewed with a tax professional before moving money.

Exceptions generally eliminate only the 10% penalty, not ordinary income tax. Also, you cannot borrow from an IRA. If you have nondeductible IRA contributions, part of the distribution may be tax-free under the pro-rata rules.