5/17/2012 6:07 PM ET|
6 ways to use your IRA now
If you need to cover emergency expenses or want to make an investment in the future, you may be able to use your retirement savings early without paying penalties.
Since its inception more than three decades ago, the individual retirement account, or IRA, has solidified its role as the investment tool of choice for long-term savers seeking tax-favored growth.
Some 46 million U.S. households, or 39%, own an IRA, according to the Investment Company Institute, most with the intent of using those dollars to supplement their income after they stop collecting a paycheck.
But the ubiquitous IRA can flex far more muscle than that.
Assets held within an IRA can be deployed for a multitude of reasons -- from estate-planning vehicle to emergency reserve to college savings plan -- often without penalty.
"There are so many exceptions to the early withdrawal penalty that there's a lot of flexibility in how you can use an IRA," says Tom Balcom, a certified financial planner with 1650 Wealth Management in Boca Raton, Fla.
For example, you can use your IRA to pay unreimbursed medical expenses for any amount that exceeds 7.5% of your adjusted gross income -- without getting hit with the 10% early withdrawal penalty that normally applies to distributions taken before age 59½.
Note: You'll still owe ordinary income tax on all distributions from a traditional IRA.
If you lose your job, you may also be able to tap your IRA penalty-free for health insurance costs, including premiums paid for COBRA continuation coverage from your former employer's plan.
To qualify for the penalty exemption, you must have received unemployment compensation for 12 consecutive weeks and received the distributions during the year you claimed unemployment or the following year. You must also receive the distribution no later than 60 days after you become re-employed.
Paying for college
Never raid your nest egg to pay for Junior's college degree, or so the conventional thinking goes. But if you're already putting enough money aside for retirement, you might consider using an IRA for higher education expenses, says Brad A. Tapscott, a certified financial planner with Ameriprise Financial Services in Charleston, S.C.
You can use your IRA at any age penalty-free to pay for college costs for yourself, your spouse, your children or your grandchildren.
"It's a 'heads I win, tails I win' situation," says Tapscott. "If your child ends up with a scholarship, then you get to retire early."
Before you drain your IRA for college tuition, however, consider the impact it may have on the child's eligibility for need-based financial aid.
IRA distributions are counted as income on the following year's financial aid application, says Joseph Hurley, founder of Savingforcollege.com, noting such a strategy might amount to a long-term loss for your struggling student.
"You may be doing more harm than good by using your IRA for college," he says, noting that 529 savings plans, which become tax-free if used for qualified education expenses, are often the better bet.
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Retiring? Phhhhsht. In the real world..., you know the pay check to paycheck world?: People are going to work until they die. If they are unlucky enough to get sick right before that happens?: Then the Medical industry will drain what little we have saved. So all this retirement talk is to keep a run on the banks from happening. Because if people really knew how much they needed and how much they fall short? IRA investments would collapse and if you thought the 2008 financial crisis was bad????
If your medical expenses exceed 7.5% of your AGI, they are deductible and not taxable, whatever source you use to pay for it.
If you convert your conventional IRA to a Roth just so your heirs won't have to pay the income tax, you are probably paying more income tax than you need to. Leave it as a conventional and let your heirs - who are more likely to be in lower tax brackets - pay the tax.
Sheesh. Anyone can call themselves a financial planning expert.
This is a dangerous game to be playing, just so some professional can brag about how much he
knows? Distributions from IRA's are potentially harmful. If the money is kept in the IRA, it has
legal protections. And think of 2013. In 2013 the IRA penalty goes from 10% to 20% thanks
to Mr Obama.
Don't underestimate the tax implications. If someone takes 25,000 dollars out of their IRA, and
they make say 60,000 in salary and are married, they just went from a 15% tax bracket to a
25% tax bracket. Plus they must pay the tax on the 25,000. Potentially a very dangerous
situation. You do not want to be in debt to the IRS.
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