Need Extra Income Now

Need Extra Income Now?

You may discover that you need extra income to help meet expenses if you’re newly retired or between jobs.

Even in this situation, placing your qualified retirement plan distribution into an IRA rollover may be a better strategy than simply withdrawing the assets. Here’s why.

When you take a distribution from a qualified retirement plan, you’re not only liable for income tax, but a 10% federal penalty tax if you’re either retired and under the age of 55 or not retired and under the age of 59 ½.

With an IRA rollover, you can withdraw assets without paying a penalty if the assets are used for unreimbursed medical expenses, provided the expenses exceed 7.5% of your adjusted gross income. Otherwise, the 10% federal penalty tax is not waived.

With an IRA rollover, you can also withdraw assets without paying the 10% federal penalty tax if the assets are used for college tuition for yourself, your spouse, children, or grandchildren as long as it is with an IRS-approved institution.

You can also withdraw up to $10,000 toward the purchase of a first home but you must plan carefully. You must use the IRA funds within 120 days of withdrawal to pay qualified acquisition costs.

If you need the money for other expenses, you may be able to take advantage of a provision in the Internal Revenue Code administered by the IRS called Section 72(t).

Section 72(t) enables you to withdraw money from your IRA without paying the 10% federal penalty tax, provided you take substantially equal payments for five years or until you reach age 59 ½, whichever is longer under the amortization and annuitization methods.

Under the minimum distribution method, the payment amount varies each year during the series. Although these payments are not subject to the 10% federal penalty tax, they are subject to income tax.

So, an IRA rollover might make sense even if your primary concern is generating enough income to maintain your lifestyle and pay expenses while looking for another job.