Retirement fund withdrawals during unemployment

Posted by Plunker on September 15, 2009, 8:36 pm

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I was downsized from my job 9 months ago and continue to be unable to
find employment. Cash is just about gone, so the time has come to
make a financial move to avoid mortgage delinquency and maintain COBRA
health care payments. I am younger than 59.

Retirement funds currently reside in the 401K my employer used to
sponsor. If I understand the law and my options correctly, if I roll
the entire 401K balance into an IRA I can:

1. Take an "unlimited" periodic withdrawal from the IRA, say monthly,
to cover mortgage and COBRA
2. The funds used for COBRA payment are exempt from 10% penalty
3. An amount of funds, equal to the amount of funds used to pay
college tuition in January 2008, is exempt from 10% penalty.

These "penalty-free" amounts are not available were I to take the
withdrawals from the 401K.

If this is a generic question, regarding the early withdrawal and
penalty differences between 401K and IRA, do I have an accurate
understanding?

Thanks in advance!

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Posted by Arthur Kamlet on September 15, 2009, 9:11 pm

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>I was downsized from my job 9 months ago and continue to be unable to

>find employment. Cash is just about gone, so the time has come to

>make a financial move to avoid mortgage delinquency and maintain COBRA

>health care payments. I am younger than 59.

>Retirement funds currently reside in the 401K my employer used to

>sponsor. If I understand the law and my options correctly, if I roll

>the entire 401K balance into an IRA I can:

>1. Take an "unlimited" periodic withdrawal from the IRA, say monthly,

>to cover mortgage and COBRA

You are using two terms here: Periodic withdrawal, and COBRA.
COBRA as part of medical insurance will be discussed below.

The rule applying to periodic distributions are not
unlimited distributions.

You have to use an actuarial formula to calculate the amount
of your annual periodic distributions, which will constitute
a Series of Equal Periodic Payments, that is designed to draw
out your IRA by the end of your statistical life span.

The IRS provides a Table in IRS Pub 590 that you can use, or
you might consider obtaining a professional opinion from a
tax professional specializing in this area. Many, not all,
IRA custodians will even use the IRS method and do the math
for you.

The amount of the annual SEPP must be distributed for at least five
years and must continue until you have reached age 59 1/2.

So it is not an arbitrary or unlimited amount, and this particular
exclusion from early distribution tax is also available for
401k plans.

>2. The funds used for COBRA payment are exempt from 10% penalty

Yes, generally. Here is what Pub 590 says:

BEGIN QUOTE
Medical insurance. Even if you are under age 59 1/2 you may not
have to pay the 10% additional tax on distributions during the year
that are not more than the amount you paid during the year for
medical insurance for yourself, your spouse, and your dependents.
You will not have to pay the tax on these amounts if all of the
following conditions apply.

+ You lost your job.

+ You received unemployment compensation paid under any federal or
state law for 12 consecutive weeks because you lost your job.

+ You receive the distributions during either the year you received
the unemployment compensation or the following year.

+ You receive the distributions no later than 60 days after you have
been reemployed.
END QUOTE

Also if you have allowable medical expenses in excess of 7.5% of
adjusted gross income, you can exclude the amount in excess of
7.5% of AGI from the 10% early distribution tax. Do not count
the COBRA payments for two different exclusions; just count COBRA
payments once.

>3. An amount of funds, equal to the amount of funds used to pay

>college tuition in January 2008, is exempt from 10% penalty.

Yes. Further, you may still use those same tuition funds to
calculate an education tax credit.

>These "penalty-free" amounts are not available were I to take the

>withdrawals from the 401K.

>If this is a generic question, regarding the early withdrawal and

>penalty differences between 401K and IRA, do I have an accurate

>understanding?

--

ArtKamlet at a o l dot c o m Columbus OH K2PZH

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Plunker on September 16, 2009, 8:19 am

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Thank you, Mr. Kamlet, for your quick reply. One clarification
requested:

> You are using two terms here: Periodic withdrawal, and COBRA.

> COBRA as part of medical insurance will be discussed below.

> The rule applying to periodic distributions are not

> unlimited distributions.

> You have to use an actuarial formula to calculate the amount

> of your annual periodic distributions, which will constitute

> a Series of Equal Periodic Payments, that is designed to draw

> out your IRA by the end of your statistical life span.

I suspect I may not have been clear - pardon any misuse of the
language. It is not my intent to draw out distributions from my IRA
starting now until the end of my life span. My intent is to use
funds,
drawn out monthly, to cover mortgage and health insurance until
I am able to find work. Two months, six months, twelve months...
until I find work or, worst of all cases, the IRA is depleted. So,
I am not planning on initiating a SEPP, if that is a retirement plan,
at this time - just trying to get some cash out to keep my home
and cover COBRA for "a period of time".

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Arthur Kamlet on September 16, 2009, 12:47 pm

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>Thank you, Mr. Kamlet, for your quick reply. One clarification

>requested:

>> You are using two terms here: Periodic withdrawal, and COBRA.

>> COBRA as part of medical insurance will be discussed below.

>> The rule applying to periodic distributions are not

>> unlimited distributions.

>> You have to use an actuarial formula to calculate the amount

>> of your annual periodic distributions, which will constitute

>> a Series of Equal Periodic Payments, that is designed to draw

>> out your IRA by the end of your statistical life span.

>I suspect I may not have been clear - pardon any misuse of the

>language. It is not my intent to draw out distributions from my IRA

>starting now until the end of my life span. My intent is to use

>funds,

>drawn out monthly, to cover mortgage and health insurance until

>I am able to find work. Two months, six months, twelve months...

>until I find work or, worst of all cases, the IRA is depleted. So,

>I am not planning on initiating a SEPP, if that is a retirement plan,

>at this time - just trying to get some cash out to keep my home

>and cover COBRA for "a period of time".

OK. Then ignore the SEPP discussion. I included it since
many people are aware there is an exclusion available for
a plan to take Substantially Equaly Periodic Payments and the word
Periodic was used here. Just ignore that discussion.
--

ArtKamlet at a o l dot c o m Columbus OH K2PZH

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Alan on September 17, 2009, 1:10 pm

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Arthur Kamlet wrote:

>> Thank you, Mr. Kamlet, for your quick reply. One clarification

>> requested:

>>> You are using two terms here: Periodic withdrawal, and COBRA.

>>> COBRA as part of medical insurance will be discussed below.

>>>

>>> The rule applying to periodic distributions are not

>>> unlimited distributions.

>>>

>>> You have to use an actuarial formula to calculate the amount

>>> of your annual periodic distributions, which will constitute

>>> a Series of Equal Periodic Payments, that is designed to draw

>>> out your IRA by the end of your statistical life span.

>>>

>> I suspect I may not have been clear - pardon any misuse of the

>> language. It is not my intent to draw out distributions from my IRA

>> starting now until the end of my life span. My intent is to use

>> funds,

>> drawn out monthly, to cover mortgage and health insurance until

>> I am able to find work. Two months, six months, twelve months...

>> until I find work or, worst of all cases, the IRA is depleted. So,

>> I am not planning on initiating a SEPP, if that is a retirement plan,

>> at this time - just trying to get some cash out to keep my home

>> and cover COBRA for "a period of time".

> OK. Then ignore the SEPP discussion. I included it since

> many people are aware there is an exclusion available for

> a plan to take Substantially Equaly Periodic Payments and the word

> Periodic was used here. Just ignore that discussion.

I would only add that a distribution from the IRA in 2009 could
be exempt from the 10% penalty if used to pay qualified higher
ed. expenses incurred in 2009. The OP asked about January "2008"
tuition, not January 2009 tuition. Assuming it was a typo, there
is no issue. If not a typo, then there would be no exemption from
the 10% penalty for tuition paid in 2008.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>