Can I use my retirement money early without penalty?

Q: I can’t seem to find a defin­i­tive answer to this ques­tion, so I hope you can help. If my husband’s TSP account has both tra­di­tional and Roth funds in it, will he be eli­gi­ble to do a 72(t) when he retires at age 53, or will the money be untouch­able until age 59–1/2? Addi­tion­ally, can I do a 72(t) on my Roth IRA before age 59–1/2 with­out penalty or owing taxes on earn­ings? Thank you!

–Anjali, Vir­ginia Beach, Virginia

 

A: Well, let me give it a shot. You didn’t ask, but my con­cern when read­ing your ques­tion was, “Are you really finan­cially ready to retire?” You may be in great posi­tion, but all this dis­cus­sion tap­ping retire­ment plan/IRA invest­ments early has alarm bells going off in the back of my head. So, here’s my first piece of advice: Do some seri­ous finan­cial plan­ning with the help of a fee-only finan­cial plan­ner. He or she should help you assess your plan, make any nec­es­sary adjust­ments and coor­di­nate with other pro­fes­sion­als that may have valu­able input; in your case an accoun­tant may pro­vide some use­ful advice. My main thought is sim­ply to look closely before you leap!

Access­ing the TSP

Your husband’s entire TSP could be set up for sub­stan­tially equal pay­ments over his life­time. When doing so, the Roth and tra­di­tional com­po­nents would be paid out pro­por­tion­ately and the pay­ments would not be sub­ject to the addi­tional 10% penalty. How­ever, any earn­ings on the Roth with­drawals that are dis­trib­uted would be sub­ject to ordi­nary income tax. The form you use to make TSP with­drawals offers the option for a full with­drawal com­puted based on his life expectancy. Your hus­band would have to con­tinue the life expectancy with­drawals until at least age 59 ½ in order to avoid penalties.

Tap­ping the Roth IRA

The abil­ity to make a series of sub­stan­tially equal peri­odic pay­ments over your life expectancy and avoid the 10% pre­ma­ture dis­tri­b­u­tion is cov­ered under Sec­tion 72(t) of the IRS code. To qual­ify, you have to make and con­tinue the dis­tri­b­u­tions for the longer of five years or attain­ment of age 59 ½.  You could do this with Roth IRA earn­ings (your con­tri­bu­tions would come out first and with­out taxes or penal­ties) and it could allow you to avoid the 10% penalty on those earn­ings; how­ever it would not allow you to receive the tax free treat­ment on the Roth IRA earn­ings that you would nor­mally receive at age 59 ½. 

In the end, if you decide it makes sense, you’ll def­i­nitely be able to access your retire­ment sav­ings, but you may not get all the ben­e­fi­cial tax treat­ment you could have enjoyed later. The key is to make sure that you have a solid game plan that works for you over the long haul. Good luck!

JJ

 

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USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor. The information is provided for informational purposes only and is not intended to substitute for obtaining professional financial advice. Please thoroughly research and seek professional representation before acting on any information you may have found in this article. This article is in no way attempts to provide advice that relates all personal circumstances.

Examples given are hypothetical illustrations and not an indication of the benefits or features of any USAA product. You should seek policies and advice based upon your own particular circumstances. Sample loans are for illustration purposes only and are not a rate quote, pre-approval, or commitment to lend.

Scott Halliwell and JJ Montanaro are CERTIFIED FINANCIAL PLANNER™ practitioners with USAA Financial Planning Services, one of the USAA family of companies. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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