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It seems to me that if I have enough money to retire, I don't have to worry about not being 59 1/2 in order to tap my IRA funds penalty-free.

Let me provide my reasoning:

Theoretical example-- At the age of 50, I have \$800,000 saved in an IRA. I calculate that if I withdraw about 4% per year, or \$32,000, I will be able to live comfortably *and* let my nest egg continue to grow.

However, of the 3 IRS-approved methods for no-penalty early withdrawal, one would provide me only about \$20,000/year (too little), the others \$69,000 and \$72,000 (too much).

*But*, using one of the last two methods, why not split the IRAs and put just enough into one account to pay me what I wish? According to a financial planner's web site I happened upon:

http://www.kathleenmiller.com/CashArticle.html

"There is no requirement that all of your IRA accounts have to be aggregated in calculating the required withdrawal. Absent such a requirement, you can simply split the (in my case, \$800,000) into two IRA accounts and move into the second account just enough cash to yield an annual payment of (in my case \$32,000)... that would give you the (\$32,000) you need and still allow you to escape the 10 percent penalty.

The IRS has issued a private ruling indicating the IRA accounts do not have to be aggregated for this purpose. While a private ruling can be relied on only by the taxpayer who requested it, such a ruling is an indication of the IRS's thinking on the question at issue."

So, if I'm able and willing to live on the same yearly income for ten years until I'm 59 1/2 (at which point I will be able to withdraw normally without penalty), can anyone find anything wrong with this?

Wondering,

orangeblood
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Your theoretical approach appears to be correct but just one question. How do you plan on living comfortably over the next 10 years at \$32,000 per? Am I missing something?
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I have a brother with this 'embarassment of riches' problem -- namely being 52 with just over a million dollars, almost all of it locked away in IRAs. He got all this by being cheap, cheap, cheap and could easily be a featured millionaire in The Millionaire Next Door and might even be, except for the fact he broke the barrier just last month. Anyhow, he ain't in equities to any great extent 'cause his worse instincts always take over and he looses money, but he will finally try a BTD5, unfortunately, it's a Unit Trust at a broker -- those worse instinct fears again. He's hanging on to a job he hates until he's 55 and maybe get swept up in another company wide housecleaning layoff, possibly to get some early retirement bennies. Must be nice to have such problems!!! And he'll live just fine on \$32,000 post tax - I doubt he'll even need that much. He drives an old car that was paid for when he got it, he paid cash for his home, which will never grace the cover of Goodhousekeeping i fear, and he shops for cloths at GoodWill Industries. Me, I can get by on \$36,000 'cause I shop at Walmart and have no desire to buy a big motorhome (home and vehicles paid for, kid out of school) and will do so when i cross \$500,000 later this year or so. My basic expenses only come to \$1,600 a month, which leaves \$1,400 a month for emergencies and/or leisure and I intend to keep going with active investing. If I only manage 10%, I go a very long time, if I get 15%, shucks! I'll get that motorhome afterall. I know I'm out of line with the 5% philosophy ( or rule of twenty), but I can truly live comfortably (for me and my wife) on \$24,000 in basic expenses with the other \$12,000 a year is really earmarked for either emergencies or savings or, in a good year, a nice vacation.
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The best part for last -- I'm going to get great milage out of that 10% capital gains tax as my joint income on dividends and interest won't ever exceed \$41,000, which I believe to be the cut-off for the 15% earned-income tax bracket. With no Social Security tax to pay, and a veyr light tax burden, I'll 'scrape buy' and still be filling up a Roth each year.
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Orangeblood,

<<"There is no requirement that all of your IRA accounts have to be aggregated in calculating the required withdrawal. Absent such a requirement, you can simply split the (in my case, \$800,000) into two IRA accounts and move into the second account just enough cash to yield an annual payment of (in my case \$32,000)... that would give you the (\$32,000) you need and still allow you to escape the 10 percent penalty.

The IRS has issued a private ruling indicating the IRA accounts do not have to be aggregated for this purpose. While a private ruling can be relied on only by the taxpayer who requested it, such a ruling is an indication of the IRS's thinking on the question at issue."

So, if I'm able and willing to live on the same yearly income for ten years until I'm 59 1/2 (at which point I will be able to withdraw normally without penalty), can anyone find anything wrong with this? >>

If that fits your plans, it might work. However, I would want the private letter ruling in my hands before I tried it. The IRS is notorious for speaking out of both sides of its mouth. What works for one often does NOT work for another as reams of case law can substantiate.

Regards…..Pixy
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gmaxwell:

Thanks for giving a real example of how one can live on \$32,000 per year. It amazes me (maybe horrifies is a better word) how people think about money. I have family members who simply can't understand how anyone should be expected to raise three kids on only \$50,000 a year. When I point out what the national average is for family income (about 32K), they don't get the connection that many families survive on much less.

Why is it so hard for some people to understand that a Toyota gets you from point A to point B just as well as a BMW. Or that a vacation camping in the mountains can be just as refreshing as a shopping spree in Manhattan. Or that mowing your own lawn isn't an insult against the meaning of life.
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>>>>Your theoretical approach appears to be correct but just one question. How do you plan on living comfortably over the next 10 years at \$32,000 per? Am I missing something?<<<<

32K is a lot of money unless, I suppose, you are in an area with a high cost of living. I have a wife and two children, ages 8 and 6... and I don't see any reason we couldn't get by on that right now. (Our household income is more than that.... but not by any great magnitude.) We are very happy in our modest but nice house in our modest but nice neighborhood.

By the time I retire, I'll no longer have a house note, and another loan that takes part of my monthly check will also be paid off. My question to you is.... why *couldn't* you live comfortably on 32K/year? Am *I* missing something?

Regards,

orangeblood
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Pixy,

>>>>>If that fits your plans, it might work. However, I would want the private letter ruling in my hands before I tried it. The IRS is notorious for speaking out of both sides of its mouth. What works for one often does NOT work for another as reams of case law can substantiate.<<<<<<

Have you not heard of this before? I was wondering how prevelant this type of thing is (splitting an IRA and only taking approved early withdrawals from one of them).

Thanks,

orangeblood
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<<Have you not heard of this before? I was wondering how prevelant this type of thing is (splitting an IRA and only taking approved early withdrawals from one of them).>>

The IRS has issued several rulings in the recent past taking the position that you are not required to aggregate IRAs for purposes of determining the amount of payments required to satisfy the "substantially equal" requirement. Normally I would say you don't need to worry if the IRS has said the same thing over and over, and said it recently. But this is a case where the position taken by the IRS seems to be contrary to what the Internal Revenue Code says. And that is probably why we have seen several rulings: the tax advisors are nervous about this, so they don't want to recommend it without getting a ruling. Given that the IRS has given the same ruling a number of times, it should be pretty easy (but not necessarily cheap!) to get your own ruling if you decide to go this way and the issue is still up in the air at that time.

KAT in Chicagoland
www.fairmark.com
Tax Guide for Investors
Now with expanded and revised
Roth IRA information
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<<32K is a lot of money unless, I suppose, you are in an area with a high cost of living. I have a wife
and two children, ages 8 and 6... and I don't see any reason we couldn't get by on that right now. (Our
household income is more than that.... but not by any great magnitude.) We are very happy in our
modest but nice house in our modest but nice neighborhood.

By the time I retire, I'll no longer have a house note, and another loan that takes part of my monthly
check will also be paid off. My question to you is.... why *couldn't* you live comfortably on
32K/year? Am *I* missing something?>>

Orangeblood,

My family of three lives on (after taxes, before investments) \$36000 in Atlanta (budgeting is great for letting you know that kind of thing....). Although prices here are cheaper than in the Northeast, this is likely the most expensive Southern city between NC and the Texas border (excluding FL).

I'm with you. \$32000 could EASILY, and comfortably, be done in the South w/o a bank note and with the kids out of college. Can't speak for other sections of the country....

Shealy
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KAT in Chicagoland,

Thanks for that info. Would you please expand on this:

>>>>But this is a case where the position taken by the IRS seems to be contrary to what the Internal Revenue Code says.<<<<<

Also, you said:

>>>>>Given that the IRS has given the same ruling a number of times, it should be pretty easy (but not necessarily cheap!) to get your own ruling if you decide to go this way and the issue is still up in the air at that time.<<<<<<

...What is the normal process and fee involved in obtaining a ruling? I am still at least 10 years away from retirement; can I get a ruling for something that far in the future? Obviously, this will affect the way I save: If I can withdraw my IRA money early (in the manner that I wish), I will continue to make contributions. If not, I had better stop now and direct my contributions elsewhere. (Though I would *greatly* prefer the former.)

Thanks,

orangeblood
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Orangeblood,

<<Have you not heard of this before? I was wondering how prevelant this type of thing is (splitting an IRA and only taking approved early withdrawals from one of them).>>

Yep, I have. But like KATinChicagoland, I am still leery of saying this positively CAN be done until I have a formal ruling by the IRS clutched in my hot little hand. Until I see it in a Revenue Ruling or IRS Notice, I just think it's safer to pursue on a case-by-case basis.

Regards…..Pixy
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<<orangeblood>>
Thanks for that info. Would you please expand on this:

>>>>But this is a case where the position taken by the IRS seems to be contrary to what the Internal Revenue Code says.<<<<<

<<response>>
Section 408(d)(2) of the Internal Revenue Code says that for purposes of applying section 72 to amounts distributed from IRAs you treat all IRAs as a single IRA. The 10% penalty, and the exception for periodic payments, appear in section 72(t). Perhaps you can interpret the language in section 408(d)(2) as having a limited purpose, but the IRS doesn't discuss this in its rulings and that makes me a little nervous.

<<orangeblood>>
Also, you said:

>>>>>Given that the IRS has given the same ruling a number of times, it should be pretty easy (but not necessarily cheap!) to get your own ruling if you decide to go this way and the issue is still up in the air at that time.<<<<<<

...What is the normal process and fee involved in obtaining a ruling? I am still at least 10 years away from retirement; can I get a ruling for something that far in the future? Obviously, this will affect the way I save: If I can withdraw my IRA money early (in the manner that I wish), I will continue to make contributions. If not, I had better stop now and direct my contributions elsewhere. (Though I would *greatly* prefer the former.)

I doubt that the IRS would provide a ruling this far in advance. You would be asking them to rule on a possible transaction many years in the future which may never actually occur, and with their limited resources they generally refuse to rule in these circumstances.

KAT in Chicagoland
http://www.fairmark.com
Tax Guide for Investors
Now with expanded and revised
Roth IRA information
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Orangeblood:
If I understand your original question was how to make withdrawals from your IRA before age 59.5.

Converting part of your IRA to a ROTH IRA may be a partial solution. If you partially convert to a roth in 1998 (and pay taxes, but you've got to pay them sometime) you can withdraw the converted amount (it counts as a contribution) tax and penalty free after 1/1/2003.

So assuming you want to retire in 2003 at age 55, convert
say \$10K a year in 1998-2002. In 2003 you can make annuatized withdrawals of \$20K a year and suppliment that by withdrawing your \$10K of contributions from the ROTHS each year.

I'm assuming that there are no unpleasent interactions between the ROTH and annuatizing the rest of the IRA. I'd be interested in what the experts say.

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>>>>So assuming you want to retire in 2003 at age 55, convert
say \$10K a year in 1998-2002. In 2003 you can make annuatized withdrawals of \$20K a year and suppliment that by withdrawing your \$10K of contributions from the ROTHS each year.<<<<<<<

I believe what you are saying here is that if option #1 of the IRS-approved early withdrawal method yields only \$20k to me, but I need \$30k, then I could make up the difference by withdrawing Roth contribution money. Questions:

1) I assume, like you, that one will be able to roll traditional IRA money into a Roth for years to come... has anyone seen anything to contradict this?

2) After a rollover, does one have to wait 5 years to withdraw the rollover "contribution," or is it immediately available?

Thanks,

orangeblood
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Orangeblood,

<<1) I assume, like you, that one will be able to roll traditional IRA money into a Roth for years to come... has anyone seen anything to contradict this?

2) After a rollover, does one have to wait 5 years to withdraw the rollover "contribution," or is it immediately available?>>

You may roll traditional IRA to Roth IRA in any year from this one foward. You will have to wait five tax years after each rollover before withdrawing that money penalty free before age 59 1/2. To avoid problems in that regard, you will have to maintain a separate rollover account for each years' rollover.

Regards....Pixy
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>>>>So assuming you want to retire in 2003 at age 55, convert
say \$10K a year in 1998-2002. In 2003 you can make annuatized withdrawals of \$20K a year and suppliment that by withdrawing your \$10K of contributions from the ROTHS each year.<<<<<<<

>>I believe what you are saying here is that if option #1 of the IRS-approved early withdrawal method yields only \$20k to me, but I need \$30k, then I could make up the difference by withdrawing Roth contribution money.<<

Orangeblood:
You understand me correctly. I put this forward as an approach to be investigated rather than a recommendation. You may also look at related approaches:
1) Take the full \$30K per year from the ROTH and forgetting about annuitization
2) Converting all you'll need in 1998 rather than in 5 yearly installments, to take advantage of 4-year averaging.

At a guess it probably makes sense to combine the ROTH with annuitization and to take advantage of 4-year averaging, as this may minimize the chance of being hoisted into a higher tax bracket by the conversion.

I believe Pixy answered your detailed questions and is more likely to be correct than I am. I'm waiting till the ink dries on the technical correction before actually doing anything.
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<<Orangeblood>>
1) I assume, like you, that one will be able to roll traditional IRA money into a Roth for years to come... has anyone seen anything to contradict this?

2) After a rollover, does one have to wait 5 years to withdraw the rollover "contribution," or is it immediately available?

<<Pixy>>
You may roll traditional IRA to Roth IRA in any year from this one foward. You will have to wait five tax years after each rollover before withdrawing that money penalty free before age 59 1/2. To avoid problems in that regard, you will have to maintain a separate rollover account for each years' rollover.

<<KAT>>
That won't be true if the technical corrections act includes the provisions recently released by the Senate Finance Committee. (I mean *very* recent, so no reason Pixy would know of this.) The rule will permit you to keep all rollovers (and non-rollover contributions) in a single Roth IRA with no adverse consequences. In fact, even if you keep them separately they'll be treated as a single Roth. The new rules are much more favorable than the previous ones (and incorporate some suggestions I made to Senate Finance staff). But I won't have time to describe details until later tonight or more likely tomorrow.

KAT in Chicagoland
http://www.fairmark.com
Tax Guide for Investors
Now with expanded and revised
Roth IRA information
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Vtaeger,

<<I'm waiting till the ink dries on the technical correction before actually doing anything.>>

As are so many of us. Until the House and Senate act AND the President signs it into law, the technical corrections remain everyone's best guess.

Regards….Pixy

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KAT,

<<That won't be true if the technical corrections act includes the provisions recently released by the Senate Finance Committee. (I mean *very* recent, so no reason Pixy would know of this.) The rule will permit you to keep all rollovers (and non-rollover contributions) in a single Roth IRA with no adverse consequences. In fact, even if you keep them separately they'll be treated as a single Roth. The new rules are much more favorable than the previous ones (and incorporate some suggestions I made to Senate Finance staff). But I won't have time to describe details until later tonight or more likely tomorrow.>>

That's great news. I just hope it survives the joint committee process intact on its way to enactment. With Congress, a lot of water gets spilled between the well and the sink.

Regards….Pixy

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<<That's great news. I just hope it survives the joint [conference] committee process intact on its way to enactment. With Congress, a lot of water gets spilled between the well and the sink.>>

I've posted a warning to this effect on my web page describing these changes. But I've been told that House staffers participated in the development of these changes and have no objection to them. Besides, if there were any disagreement it's a pretty good bet that Senator Roth's changes would prevail concerning changes to the Roth IRA!

KAT in Chicagoland
http://www.fairmark.com
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KAT,

<< Besides, if there were any disagreement it's a pretty good bet that Senator Roth's changes would prevail concerning changes to the Roth IRA! >>

Sheesh! Just because his name is on it and all doesn't mean the broker's lobby won't overrun him when they see the potential of lost dollars by not being able to charge for the maintenance of two or more accounts, does it? Just think of all the contribution dollars they can throw at defeating it. :-P

Regards…..Pixy