I have over 50K in an IRA - and have no job...can I get around the penalty for early withdrawal?

Question

Here's the situation:

I'm a 35 yo single mom with a Master's degree. I don't get child support, have no idea where he is and going through the state takes no less than 8 months to even get the process started. I don't qualify for unemployment because I didn't work enough last year. I don't qualify for welfare because I own my house BUT can't sell right now with the current market I'd have to come up with a lot of out-of-pocket to sell - I don't have it.

I was out of work last yr from Apr-Oct. We lived off my savings then. I landed a short-term contract in Oct which ended in Jan. I've been job-hunting but nothing certain yet. I'm not "in the red" YET but it's getting to that point.

I'm currently UNEMPLOYED w/ no health insurance, no income, no real prospects and no where to turn YET I have this money in an IRA - can't worry abt retiring when I may be homeless. Is there ANY way - special programs or anything that I can access my money and even defer paying it back once I do get a job.

The IRA is through TROWE. I rolled over all of my 401K's into this single IRA in when I left my last FTE. I had several 401K's with all my different past employees and didn't want to continue tracking all of the info in different places. It's one of those IRA's that adjust with age (from aggressive-moderate-conservative) the closer one gets to retirement. ALL before tax money....

Answer 1

There is a option to withdraw money from an IRA without the penalty, though you still have to pay the tax on the amount withdrawn.

It is called a 72 (T) option. You have to determine your life expectancy, then divide the IRA into an equal number of payments, one payment for each year of the life expectancy.

The catch is that you can not change this option once you initiate it. Google the option for more details, and how to go about doing it.

So, it is not something you really want to do unless you're absolutely in a bind.

Answer 2

Some IRA managers have programs that will allow you to take out a loan against some of your IRA assets. You might check with whomever manages your IRA.

Other than that, the only ways to avoid the distribution penalty are:

1. Your death (I don't recommend this one)
2. Your total and permanent disability (I don't recommend this one either)
3. A distribution (withdrawal) equal to or less than your deductible medical expenses (medical expenses that exceed more than 7.5% of your income)
4. A distribution equal to or less than the amount of qualified higher education expenses that you incur in the same tax year.
5. A distribution in order to pay for a first-time home purchase
6. A distribution used to pay health insurance premiums if you are unemployed.

Option 6 might help a bit, but you'd have to document (prove) that you're purchasing COBRA insurance or some other health insurance.

My advice to people in similar situations is go ahead and pay the extra 10% penalty tax. If you need the money, you may as well get 90% of it and use it. In fact, I practice what I preach. About a year ago, I had $12,000+ in an IRA and I was in such financial hot water that I cashed it in for just under $10K after taxes and penalties, and took the hit so I could use the rest of the money.

Good luck! And if you get to the point where you start an IRA again, start a ROTH IRA. Since the contributions are taxed before you put them in, you can withdraw your contributions (but not the "interest" it earns) at ANY time, even before you hit 59 1/2.

Answer 3

It depends on what kind of IRA it is.. Roth or not.. To simplify, if the money was put into the IRA after regular payroll taxes had been applied.. there will be no penalty at all.. but it will have to be accounted for with this years taxes (next april 15th)
But even if it was not an after tax deduction.. so what? After the standard average reduction for combined state & federal taxes + the early withdrawal penalty was factored in, you would be left with about 30-32K out of the original 50K.. The stock market is overdue for a downturn.. take the money and take a year to get yourself organized.. it will only take 3 years to replace it if you max out your contributions when you get back to work.. you will just have to be disciplined enough to make the sacrifice and lower your standard of living when you are in a position to do so.. and that means AFTER you get the next job as well. You earned the money.. and if you need it, you need it. I would take it. There will be no option for making replacement contributions.. so, you will have to start over with nothing. But, it sure beats the alternatives.

edit.. just noticed that you did not mention if the IRA was associated with a retirement plan from a former job.. if it is not, the process will be very complicated and have to be dealt with by the institution that manages the account. If it is part of a retirement plan from a former employer, you are entitled to it as a 'direct rollover' to yourself. You will just need to get the distribution paperwork from the old employer or the firm controlling the account.

To be totally honest.. there isn't enough information there to know what you have for an IRA.. And everyone that has answered seems to be guessing .. (myself included)
Follow this link and it will give you a very simple to understand, but detailed description of your options.. and it has all the distribution rules for each type of IRA
http://www.fool.com/money/allaboutiras/allaboutiras01.htm

Answer 4

You need to get some sort of a job just to feed yourself and your child until you find a "real" job. Wait tables--it's flexible and you can earn a lot and you can probably get hired and start somewhere within a week.

If you can't do that, can you get a home equity line of credit or a credit card to last you a month or two while you pull your life together?

If neither of those is options and you can't borrow from family/friends, then just take out $2000-$5000 from your IRA to tide you over--and get it together ASAP. You don't owe the taxes (and maybe not even the penalty...) until next April when you file your taxes, and hopefully by then you'll have a job. But stretch that money--get food from food banks and live as poor as you can. $2000-$5000 should last you several months in almost any city.

Answer 5

There are two separate 'penalty' issues that you may be facing.

First, there is the Tax Penalty you do face for taking money out of an IRA. This should not be a problem because that Tax Penalty isn't really a penalty at all - whatever you take out of the IRA will be treated as current income (except for any part you can show was deposited from after-tax dollars). The financial institution will withhold 20% of what you withdraw, which they will send to the IRS just like ordinary income tax withholding. For most people, the act of closing out an IRA, or making a major withdrawal from an IRA, represents a Tax Penalty because by being taxed as current income, it generally is taxed at a higher rate than the rate that would be expected if the person were withdrawing a small retirement amount from the account. In your case, with no current income, there is no significant tax penalty.

The other penalty you may face would be a "penalty for early withdrawal" that the financial institution may impose as part of the contract for whatever financial product you have. If you are dealing with an honest and reputable institution, that "penalty" is never more than the interest earned on the money you deposited, possibly plus some relatively small service fee. The concept is that long-term deposit investments generally earn a higher interest rate than similar short term despoits. Any time you are depositing money with a financial institution, you face a decision balancing liquidity with rate of return. A 30-day CD pays less interest than a 1-year CD, but you have more access to your money.

An IRA can be in one or more types of investments, but whatever combination you and your financial advisor chose, one underlying assumption was that it was intended to be a long term investment. You should be able to get back all or most of the money that YOU put into the IRA, but you will lose all or most of the interest that the financial institution has credited to your balance, plus incurring some handling fees (all of which are designed to discourage you from taking your money out of their institution). They would much prefer to sell you a loan, secured by your IRA, rather than give you back any of your own money. The overall cost of borrowing money against your IRA will probably be higher than what you would lose taking some money out of the IRA, but you would need to chunch those numbers yourself. If you borrow money against the IRA, you will have to make the payments on that loan -- if you take money out of the IRA, all your costs for that money will be up front and you won't be facing a payment.

Are you sure that you owe more on your house than the market value? Although the housing market is terrible right now, in most areas houses are still selling for as much as ever, they just aren't selling as often or as fast. If your situation is tight, but more or less under control (as you seem to describe it) you may need to sell your house (even breaking even) and step down to something less expensive in keeping with your likely income.

Or, if the situation is hopeless, you could quit paying the mortgage and just wait for them to foreclose - a process that will take six months or more. I do NOT advise this choice, but if the mortgage is taking food off the table, you need to make some hard choices.

Please find someone knowledgable who you trust and take a thorough look at your total situation.

Answer 6

Unfortunately being unemployed doesn't meet the criteria to get around the penalty. A couple of examples are, buying your first house or paying off medical bills (not insurance premiums). You could think of taking a portion of it. I think the penalty is 10% additionally you would have to show the amount as income on your 2007 tax return. So let's say you take out $10,000. The penalty will be $1,000 (you don't pay it immediately) and if you don't make a whole lot the rest of this year, your income tax liability would be minimal.

Answer 7

I would say keep looking for a job. Taking money out of your IRA is not a good idea. You will definitely get burned because of the interest and penalties they will charge you. Even if you have to take a lower paying job that you dont like for a while that's better than no job.

Answer 8

Hi, I have several options for you. There are potentially ways to access some IRAs without incurring the 10% early withdrawal penalty, but it depends on several factors.

For the record, in California, I am licensed in real estate, loans, and insurance. I also offer seminars as a certified TEAM member, where I teach people to optimize their assets, including IRAs.

I would be happy to offer you some options if you would like to contact me via Yahoo! IM. Without more detailed information, I can't say for certain what your best options are, but based on the information you've provided, I believe you have some good ones.

Answer 9

Nope. Not without paying the penalties. The Government gives you this investment vehicle for your retirement. Not for spending when you lose your job. Find another job. You can do it. You'll be doing yourself a huge disservice if you give up and waste your retirement fund.

Answer 10

Not really - though you probably don't have to take the whole thing out - see if they will let you take what you need - pay the penalty on that, and leave the rest.