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Precious Metals IRA

 

Tap Into Your Retirement Plan Early

TSI September 2006 Part II
August 24, 2006
 
WEALTH PRESERVATION
Tap Into Your Retirement Plan Early and Don’t Pay the IRS a Dime in Penalties
By Larry Grossman
Yes, it’s possible to retire early and skip the penalties. In fact, you can retire anytime before you turn 59 1/2 and never pay the IRS the 10% fee for early distributions.
If you’ve built up your assets to the point that you can afford to retire, I’ll show you how you can do it starting tomorrow…including tapping the assets in your tax-sheltered retirement plan…and not pay the IRS a single dollar in penalties. And you can do it whether you’re 35, 45 or 55, or any age in between.
In fact, I’ll show you where to get the IRS form to file for early retirement—and skip the 10% early-retirement penalty.
Sadly, even most financial planners don’t have a clue the IRS will allow you to take your retirement distributions early without any penalty. But I have been helping a small number of clients quietly do this for years. And now I’m going to let you in on the secret.
But first a little background...
IRS: Pain in the ARS*
The IRS says that if you want to pull money out of your retirement plan before the age of 59 1/2, then you’re responsible for the income taxes on the amount and a 10% penalty. Now this may not sound like a lot. But those lucky individuals ready to retire early are already likely to be in or near the highest tax bracket of 35%. That means the 10% penalty could easily push their total government bill to as high as 45%. That’s usually enough to keep any sensible individual from taking early retirement. But that’s where the relatively unknown “72(t) distribution” comes into play. This obscure provision in the tax code is an “election” and allows you to partially or entirely skip this onerous penalty. I like to call it the “Hey, I have done a good job and now I am going to retire early” election.
The Logistics of Retiring Early
Basically, all you need to do is tell the IRS you want to retire early, and you want to start taking funds out of your retirement plan. And to use this “get out of penalty free card,” you need to tell them you want to take early retirement under section 72(t).
It’s important to structure a 72(t) distribution the right way or it ends up triggering the 10% penalty anyway. But the good news is its not that complicated. Basically, 72(t) says that you must take substantially equal periodic payments throughout the course of your retirement and gives you three separate methods for calculating these payments.
These three methods of payment are just complicated enough to reinforce the idea that the IRS thought them up. But these different pay-out options are just that—options. They give you different ways to calculate your retirement distributions. And you choose the distribution method that matches your financial situation, depending on whether you want to maximize or minimize your distributions.
Three Ways to Calculate Your Distributions
1.        Required Minimum Distribution (RMD) Method: This is the easiest method to understand because it’s similar to calculating normal IRA distributions. This method uses your life expectancy as the basis for your distributions. Your life expectancy becomes the dividing factor for your distributions. For example, say you’re 40 years old, and according to the IRS life expectancy table, you’re supposed to live another 45 years. So you would take 1/45th of your retirement fund as a distribution the first year, then 1/44th the second year, 1/43rd the third year…and so on. With this method, your distributions increase a little each year. But, depending on the size of your retirement plan, the distributions are relatively small. And if you’re married, you have added flexibility to increase or decrease your distributions. You can take a distribution based on your life alone if you want to maximize your distributions, or you can take a distribution based on the joint life expectancy of you and your spouse. Assuming your spouse is younger than you, this will minimize your distributions.
2.        Fixed Annuitization Method: This is an annuity program. The amount of annual payments you receive is based on the size of your retirement plan. You can find out your annuity factor by visiting the mortality table in Appendix B of Rev. Rul. 2002-62 on the IRS website. Once you have your annuity factor, you divide the entire worth of your retirement plan by the annuity factor that would provide one dollar for every year over your life. The final calculation is your annual distributions over your lifetime. These never change. The annuitization method allows a much larger payout each year than the required minimum distribution method (almost double in some cases).
3.        Fixed Amortization Method. This distribution method is based on both your life expectancy and an assumed interest rate. (This interest rate can’t be more than 120% of the IRS’ interest rate assumption or “federal mid-term rate.”) After the initial distribution, you get to take equal distributions for the rest of your life. And they are more than double the required minimum distributions. And, if for some reason, you need to start taking less out of your retirement fund every year (for example if your stock picks tank), you can make a one-time switch to a smaller distribution plan, like the RMD method.
Feel free to visit http://www.irs.gov for an example of each calculation method.
You Only Have to Take Out Retirement Funds Until You Turn 59 1/2
If you decide to retire early, you only have to take distributions out of your IRA until you turn 59 1/2. Once you hit the magic age of 59 1/2, you can stop taking distributions and start taking them again anytime in the future (up to age 70 1/2). Then once you hit 70 1/2, you have to start taking distributions again, but this still leaves you an entire decade where you can opt out of your retirement plan assets if you wish. Or you can continue taking your normal distributions once you hit 59 1/2—it’s up to you. This gives you the flexibility to retire early and exercise some control over your distributions.
So what does this mean for you? Plain and simple: if you’re fortunate enough to have the necessary assets and you’re ready to “chuck it all” and retire, then this fairly unknown IRS tax form could be your solution.
And as always: retirement and tax planning are complex areas and you should always seek professional tax and legal advice.
EDITOR’S NOTE: Interested in using a 72(t) to retire early, but want more information before you make your final decision? You can calculate your personal distributions on the special 72(t) calculator on Sovereign International Pension Services’ brand new website at http://www.sovereign pensionservices.com.

Larry C. Grossman, CFP™, CIMA™, is one of only approximately 1,500 financial professionals nationwide to hold the coveted designation of Certified Investment Management Analyst. He is also Managing Director of Sovereign International Asset Management in Palm Harbor, FL. In 2006, he established Sovereign International Pension Services to further help clients achieve greater flexibility, asset protection and investment opportunities for their retirement plans. He can be contacted at 727-784-4841. Email: lgrossman@worldwide planning.com. Website: http://www.worldwideplanning.com.
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