Early withdrawals from an IRA or 401(k)

Retirement Education

Early withdrawals from an IRA or 401(k)

Avoid 10% IRS penalty before age 59?

You've been diligently saving for retirement in an IRA, a 401(k), or both. Now you need that money sooner than expected--maybe because of a job loss or other unplanned financial need. If you're younger than age 59?, however, it can be costly. You'll have to pay a 10% IRS-imposed penalty, in addition to income taxes, on the amount you withdraw. According to the IRS, money in an IRA or 401(k) is meant for retirement. As an incentive to encourage people to save for retirement, earnings can grow tax deferred until withdrawn. The 10% penalty is to discourage you from using this money prior to retirement.

Exceptions to 10% penalty

IRA: ? Death ? Disability ? First-time home purchase ? Qualified higher education expenses ? Certain medical expenses ? SEPP/72t

401(k): ? Death ? Disability ? Separation from service after age 55 ? SEPP/72t

For 2020 only, as part of the CARES Act in response to the COVID-19 pandemic, the 10% penalty will be waived for anyone infected with or economically impacted by the coronavirus.

1

"Catch-all" exception: SEPP/72t

If you don't meet any of the more specific exceptions, the SEPP/72t is a "catch-all" exception that you can use. The Systematic Equal Periodic Payments (SEPP) is also known as 72t (that's the Internal Revenue Code section). Section 72t allows you to withdraw from an IRA or 401(k) prior to age 59? without incurring a penalty if you follow certain rules.

How a SEPP/72t works

First, your accountant or financial professional calculates exactly how much you can withdraw each year. The calculation is based on three factors: your age, the IRA or 401(k) account balance, and an interest rate up to 120% of the Applicable Federal Midterm Rate (released monthly by the IRS).

You can choose from three calculation methods:

Amortization

Annuitization

Required minimum distribution

Amortization and annuitization provide the highest distribution amount. With these methods, an exact dollar amount is calculated. You must withdraw it each year for the LONGER of five years or until you turn age 59?. You CANNOT take more or less than this amount any year. Doing so will disqualify you from the 72t exception and you will owe the 10% penalty retroactively on withdrawals already taken. If your circumstances change and you want to take out less, the IRS allows a one-time recalculation using the required minimum distribution method.

The required minimum distribution method recalculates each year using the year-end balance of your account. Your withdrawal amount will vary each year. Again, you must take only the calculated amount, no more and no less, or the 10% penalty will be retroactively applied. You cannot change the required minimum distribution method to the amortization or annuitization method.

2

Consider these examples

Amanda, age 53, retires early from her job in April 2020 with a $600,000 IRA. She needs that money immediately and selects the amortization method, which provides a $25,547 yearly withdrawal. She must take this exact amount until she reaches age 59? and cannot take more or less in any year without being disqualified from the 72t exception. If this happens, the 10% penalty is retroactively applied to all previous withdrawals.

Amanda

age 53

Retires early in April 2020 with a

$600,000 IRA

Amortization method

$25,547

yearly withdrawal until age 59?

Brian, age 57, sets up a 72t distribution for a $300,000 IRA to supplement his income beginning in April 2020. He chooses the annuitization method, which provides a $13,953 withdrawal per year. He must take this exact amount for five years and cannot take more or less in any year without being disqualified from the 72t exception. If this happens, the 10% penalty is retroactively applied to all previous withdrawals.

Brian

age 57

Sets up 72t distribution with a

$300,000 IRA

starting April 2020

Annuitization method

$13,953

yearly withdrawal until age 62

Because they chose amortization and annuitization, Amanda and Brian could change their distribution method to the required minimum distribution method.

Keep in mind

As you can see, a 72t can be complicated. It's important that you work with a financial professional or tax advisor to discuss the ramifications of a 72t distribution from an IRA or 401(k). If you're considering taking one from an annuity, it may be allowed only on certain contracts. Be aware that a 72t distribution can have negative consequences on any additional living or death benefits attached to that contract.

3



This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. To obtain such advice, please consult with your investment, legal, or tax professional.

Annuities are long-term investment vehicles designed for retirement purposes. Annuity contracts contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. Your financial professional can provide you with complete details.

Delaware Life Insurance Company (Waltham, MA) is authorized to transact business in all states (except New York), the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, and is a member of Group One Thousand One, LLC (Group1001). Annuities are issued by Delaware Life Insurance Company, and variable annuities are distributed by Clarendon Insurance Agency, Inc. (member FINRA). Both companies are members of Group1001.

? 2020 Delaware Life Insurance Company. All rights reserved.

DGI021EW

2020040052 EXP 04/21

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download