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Retirement Lump Sum Payouts

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We've all been taught since we've been kids that you can't withdraw from an IRA until you are 59 12. Well, as usual, the IRA has exceptions to their rules. So if you retire at 55, and want to use your retirement funds, you can withdraw money from an IRA within a very limited set of rules. The IRS requires that you take a fixed periodic payment for at least 5 years or until you are 59 12, whichever comes later.

That sounds like Greek, so we'll give you some examples to clarify the rules. This is a very obscure and little known rule and it's important for people who are forced to retire early or want to retire early. No one wants to pay more tax than they have to and no one wants to pay a 10 percent penalty on retirement money withdrawn before they are 59 12.

If you retire at 57 and set up a monthly payout for five years, you won't be able to change your payout until after age 62 since you need to take the fixed payment for 5 years. But if you retire at 52, you'll need to continue the fixed payment for 712 years until your 59 12 to guarantee you aren't penalized for the withdrawals. Of course, the funds are taxed, but not penalized.

The monthly payout is calculated based on your life expectancy, similar to a minimum required distribution, so visit with a CPA before you use this interesting option.

Also remember when you rollover funds, that the total can be divided into separate accounts and the funds used differently. If you want to set up fixed payments, know they cannot be changed without creating a tax nightmare. Not once during the entire time period can you change the payout, so if you need more money, you'll be penalized for all the years you've been taking withdrawals. Thus, it's best to have another fund, either with other retirement money or preferably with nonretirement money from which to purchase a car or other needs.

The following are things to remember with a lump sum payout:

  • Roll-over, don't withdraw your lump sum payout to prevent possible penalties, and certainly income taxation on the funds.

  • Use a “trustee to trustee” transfer of funds to prevent income tax withholding. This continues deferral on the funds until withdrawn.

  • Withdrawals before age 5912 can be accomplished without a 10 percent penalty, but within strict guidelines.

  • Review whether to stay with the same investment firm as your employer is using, or look for a fee only financial advisor to guide you where to move your money.

  • The total retirement fund can be rolled into various retirement accounts, to be used differently.

  • An IRA annuity has greater internal costs than just an IRA or just annuity.

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Excerpted from The Complete Idiot's Guide to Personal Finance in Your 40s and 50s © 2002 by Sarah Young Fisher and Susan Shelly. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book visit the Idiot's Guide web site or call 1-800-253-6476.


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