NY (917) 991-2945 | NJ (201) 771-5871 Robert@cannonwealthsolutions.com
I was forced, due to health reasons, to retire at age 58 on December 8. I had been with my company for 34 years.
I need to cash in my IRA fund for money to pay bills and insurance. What is the best way to avoid having to pay the IRS the 10% penalty before age 59½?  Thank you.
Dear Susan:
First off, do you have any funds in the company’s retirement plan? If so, you could take a distribution from the plan and qualify for the age 55 exception to the 10% penalty. You wouldn’t have to do anything special other than elect a distribution. The plan would handle the tax reporting.
However, this exception does not apply to IRAs. Therefore, if you only have IRA money, you will have to see if any of the other exceptions apply. For example, since you are unemployed, you may be able to take an IRA distribution to pay health insurance premiums. A distribution for this purpose is exempt from the 10% penalty. However, you must receive state or federal employment for at least 12 weeks to qualify for the exception. Also, bear in mind that this exception wouldn’t cover any additional distribution to help with the cost of other bills.
Secondly, depending on the amount of your medical expenses, you could qualify for the medical expense exception. If your medical expenses exceed 7.5% of your adjusted gross income, you can take a distribution to cover those expenses and avoid the 10% penalty. However, just like the health insurance exception above, this only applies to the amount used for medical expenses. If you take out additional money to cover other expenses, the 10% penalty would apply to the excess.
Third, if your medical condition is serious enough, you could qualify for the disability exception. However, this definition is very stringent and requires you to be unable to engage in any gainful employment. If you have a Social Security disability award, you can consider using this exception. Any distribution from a person considered disabled is exempt from the 10% penalty.
Finally, you could look into setting up a 72(t) payment plan. This is a series of substantially periodic payments and each payment is exempt from the penalty. Keep in mind that these payment plans are complex and must stay in place for either 5 years or until you reach age 59½, whichever is longer. Moreover, there is also no guarantee that the payments will meet your financial needs and the tax penalties for noncompliance are heavy.
In the end, you want to start with the employer plan. If that is not available, determine whether you qualify for the disability exception. If that doesn’t work, you will want to consider using the health insurance exception or the medical expense exception to cover those expenses and paying the 10% penalty on any excess distribution. Finally, if none of those approaches meets your needs, you can talk to an advisor about setting up a 72(t) payment plan.
I’m considering going back to work part time to my former employer where I still have a 401(a), partly to defer RMDs, as I am now 72. I believe that I can become employed part time by this organization, but this position would not be eligible to participate in the 401(a).
Reading my plan literature, I’ve learned that not all employees are eligible to participate in the 401(a).
To be able to defer RMDs, do I merely need to be employed by my former employer, or do I need to actually be a participant in the 401(a) now?
Dear WorkingStiff:
You understand the situation correctly, but you will want to check the Summary Plan Description (SPD) for the retirement plan for final confirmation. The tax code allows retirement plans to delay RMDs for individuals who are over age 70½ but remain working. This exception also applies to someone who retired but later returned to the same employer. Additionally, it doesn’t matter whether the employment is part-time or qualifies for participation in the plan. As long as the individual is still working for the employer that sponsors the plan, RMDs can be delayed. However, this is an optional provision for plans. That means plans can choose to process all RMDs at age 70½, regardless of working status. As a result, you will want to review the SPD or contact the plan administrator to see if the “still working” exception applies.