Getting Cash From Your IRA
Need a cash infusion, but don't want to pay the 10 percent penalty for making an IRA withdrawal before retirement age? Under the little-known IRS provision Code 72(t), you can take a penalty-free distribution for a variety of purposes, including disability, medical costs, the purchase of a first home, higher-education expenses, conversion to a Roth, and equal, periodic payments for income.
"For many IRA holders, it's a great way to access retirement dollars early," says Cathleen Davis, a consultant in Wachovia's IRA marketing department, who adds that distributions must comply with certain conditions. For example, penalty-free withdrawals for qualified first-time home buyers are limited to a total of $10,000, while medical expenses must be greater than 7.5 percent of the IRA holder's adjusted gross income.
People who rely on their IRAs for income face the most restrictions. They must take equal and substantial payments for five years or until age 59 and a half, whichever is longer. "The amount of the distribution must be based on the life expectancy of the account holder and be calculated in accordance with IRS guidelines," explains Davis, who advises you to consult with a financial planner to set up the payments properly. "The rules are quite complicated. It's essential to get it right."
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