Early Retirement – withdrawing money (penalty free!) from an IRA before age 59 1/2

Situation:

A THOR client recently retired from a large corporation. He was rolling over more than $1 million from his company retirement plan into an IRA account. The client had very little in assets outside of the IRA and needed to start withdrawing money from the IRA as soon as possible. He was 56 years old, below the minimum distribution age of 59½, and wanted to avoid a 10% tax penalty on early withdrawals, if possible.

Solution:

THOR’s first step was to get a clear picture of the client’s financial situation including current assets, income and expenses. Part of this analysis was to project future expenses and available income, including Social Security. Since many individuals don’t have a firm grasp of expenses when they first retire, we used our years of experience working with retirees to help guide the client in establishing a budget for the next several years. The next issue was determining how to pay for those expenses. Since a majority of his investable assets were in an IRA and his assets outside the IRA were not enough to cover expenses for the next 3 ½ years, a solution was not readily apparent to the client. With several years of experience helping clients determine the best method to distribute their assets once in retirement, THOR advised him that, since he was over the age of 55, he could take money out of an IRA, penalty free, in the form of a fixed annual withdrawal from the IRA over a 5-year period. This provision is called “substantially equal payments.” There are several methods to calculate the allowable amount that can be withdrawn. THOR worked closely with the client in determining which method would be best to not only cover current expenses, but ensure the investment assets would last throughout the client’s lifetime. THOR’s active planning and investing are now allowing him to enjoy retirement without the worry of outliving his investment assets.