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I’ve been reading a Kiplinger article outlining four retirement mistakes, and so far I’ve written a little about early withdrawal of retirement funds. Saving for retirement is simple, but it takes discipline. It takes some knowledge of the rules, too, because a few small mistakes can set you back years. Here is another example.
When you’re in retirement, don’t interrupt your annual payments. Any deviation may cost you a 10% penalty plus interest from the time your distributions began. Here’s an example:
Let’s say you have $500,000 in your IRA when you begin taking distributions at age 56. The IRS life-expectancy table estimates that you will live another 28.7 years. Under the simplest minimum-distribution method, you would have to withdraw $17,422 the first year, then divide your subsequent IRA balances by your declining life expectancy for each of the next four years…
If you don’t need that much money, you can split your IRA into separate accounts and set up a periodic-payment plan with just one of them… Say you took out $75,000 in 72(t) withdrawals over four years, then stopped before reaching the five-year threshold. You would owe more than $8,000 in penalties and interest.
Splitting the IRA into separate accounts seems to be the best way to go in order to avoid huge fees. As with any other decision that could result in fees, talk to a financial planner.
Updated September 17, 2011 and originally published June 12, 2007. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.