| Dual income families and megabucks 401(k) plans are | | | | Roth IRAs are not includable in income when |
| common socio-economic trends that get today's | | | | withdrawn. |
| Boomers thinking about early retirement. If you elect to | | | | Here are the exceptions: |
| retire early and roll your 401(k) plan into an IRA, how | | | | 1. Death. Granted, this is not the best way to start your |
| can you best set up a withdrawal plan? | | | | early retirement, but it is an exception. |
| First, it depends on what kind of IRA you have. The | | | | 2. Disability. |
| rules differ for Roth IRAs. Second, it depends on | | | | 3. Withdrawals that are a part of what are referred to |
| whether you retire before or after age 59 1/2. For our | | | | as "substantially equal periodic payments" (SEPPs). |
| purposes, we are going to assume retirement occurs | | | | Using this approach is one of the most viable solutions |
| before age 59 1/2. | | | | to early retirement and a subject all to itself. |
| What Income is Taxable? | | | | 4. Made for medical care. However, this is limited to |
| The first issue is to be clear on are the rules as to | | | | rules on the deductibility of such items, which currently |
| what IRA withdrawals are taxable income. With | | | | applies to those medical expenses in excess of 7.5% |
| traditional IRAs, the answer is easy: All income is | | | | of your adjusted gross income. |
| taxable. However, if you made non-deductible | | | | 5. For the payment of health insurance premiums, but |
| contributions to a traditional IRA, SEP or SIMPLE IRA, | | | | only if you are unemployed. |
| distributions are prorated. Any deductible contributions | | | | 6. Made to pay for qualified higher education expenses. |
| and earnings are taxed; your non-deductible | | | | Not only could you go back to school, but this also |
| contributions come out tax-free, inasmuch as you have | | | | applies to your spouse, your children or your |
| already paid tax on them. | | | | grandchildren. |
| Distributions from Roth IRAs are treated as coming | | | | 7. Made for first time homebuyers. It isn't likely that you |
| first from your contributions and then from earnings. In | | | | are hunting around for your first starter home, but this |
| addition, Roth IRAs have a "qualified distribution" rule. | | | | also applies to your spouse, your children or |
| The first hoop to jump through is to have had your | | | | grandchildren. The limit, however, is $10,000. |
| Roth for five years. The five-year clock starts running | | | | 8. Made to a reservist while on active duty. This is a |
| when you make your first Roth contribution. If you | | | | new exception included in the Pension Protection Act |
| have satisfied this five year rule, are under age 59 1/2 | | | | of 2006. The exception period is after 9/11/01 and |
| and disabled, you can take out contributions, as well as | | | | before 2008. |
| earnings, tax-free. | | | | Now that you are armed with this information, I hope |
| The 10% Early Distribution Penalty Tax | | | | that you are in a better position to assess the viability |
| Withdrawals from IRAs that are includable in income | | | | of retiring early. I would recommend becoming familiar |
| and taken before age 59 1/2 are subject to a 10% | | | | with the options available under the substantially equal |
| early distribution penalty tax unless an exclusion applies. | | | | periodic payments exception. These may be the key |
| Note, as per the discussion above, that contributions to | | | | to your early retirement. |