Although generally speaking, you can access the funds in your IRA at any point, the issue is whether you will be charged a penalty. Because an IRA is meant to be a “retirement account,” the laws are made to discourage you from raiding your IRA funds until retirement. However, as with most things, there are exceptions. Our estate planning attorney can explain when it is the right time to access your IRA.
Planning your retirement with IRAs
Have you created your retirement plan yet? It’s not too late to start. If you want a comfortable retirement, you can’t simply rely on your Social Security benefits. Instead, you must plan ahead and create a comprehensive retirement plan that will meet your future needs and allow you to relax comfortably in your golden years. Individual Retirement Plans (IRAs) are an easy way to start your plan while saving and investing in your future.
The basic terms of an IRA
With a traditional IRA, if you withdraw money before you turn 59 ½, you will be required to pay a 10% penalty on the total amount you withdraw. That penalty is in addition to the income tax you will also be required to pay. A Roth IRA, on the other hand, allows you to withdraw your contributions, without penalty, at any time as long as you do not withdraw any of the earnings before age 59 ½.
Once you reach age 59 ½, you can make penalty-free withdrawals from a traditional IRA account, but you will still owe income taxes on withdrawals from a traditional IRA. With a Roth IRA, you can withdraw penalty-free at age 59 ½, as long as it has been at least five years since your first contribution. If you have questions about the different types of IRA accounts, our estate planning attorney can help you out.
Exceptions to the early withdrawal penalties
It is possible to “take back” one of your contributions made to a traditional IRA if you do so before the deadline for filing your personal income taxes and you do not claim a deduction for the contribution. You can roll over your traditional IRA into another qualified retirement account within 60 days without any penalty. This means, though, that you cannot spend any of the funds.
No penalty for certain uses of the funds
There are also a few exceptions to the 10% penalty, depending on the reason you are withdrawing the funds. Put another way, if you plan to use the money for one of these following reasons, you will not be penalized:
- Paying college expenses for you, your spouse, your children or grandchildren.
- Paying medical expenses greater than 7.5% of your adjusted gross income.
- Paying for a first-time home purchase (up to $10,000).
- Paying for the costs of a sudden disability.
“Substantially Equal Periodic Payments”
In situations where you really need the cash, you can consider taking what is referred to as “substantially equal periodic payments” from your traditional IRA. The IRS will determine the amount you can receive each year. That amount will be based on your life expectancy and you are allowed to withdraw that amount each year. However, once you begin receiving substantially equal periodic payments, you cannot stop until you are 59½ or five years have passed, whichever is longer. If you do change your mind, you will be assessed the 10% penalty retroactively from the first payment.
Understanding the various types of IRAs
There are four kinds of IRAs with various benefits. Traditional and Roth IRAs are established by individuals, whereas Simplified Employee Pensions (SEPs) and Savings Incentive Match Plan for Employees (SIMPLE) are sponsored by employers. Regardless of the type you choose, all IRAs are “fully vested.” This means all of the contributions you make and earnings you accumulate belong to you, including the contributions made by your employers. Again, if you still have questions, speak to our estate planning attorney.
Limitations on contributions depend on the type of IRA
The IRS has established limitations on the total amount of annual contributions you can make to an IRA account. These limitations are subject to change each year. For that reason, you should always consult with your retirement planning attorney to determine the current limitations for that year.
In 2017, the maximum contribution for both Traditional and Roth IRAs is $5,500, for individuals under the age of 50. For those over age 50, the limit is $6,500. The maximum contribution for a SEP IRA is $53,000. The limit for a SIMPLE IRA is $12,500 if you are under age 50 and $15,500 if you are older.
If you have questions regarding IRAs or any other estate planning matters, please contact the experienced attorneys at Gaughan & Connealy for a consultation. You can contact us either online or by calling us at (913) 262-2000. We are here to help!