Individual retirement accounts allow you to receive tax benefits when you put money aside for retirement. You can deduct the money you contribute to a traditional IRA, although you must pay taxes on withdrawals. The money you contribute to a Roth IRA is not deductible, but you can withdraw money tax-free if you observe the rules. Both IRA types typically require you to reach age 59 ½ to avoid withdrawal penalties, but you can avoid these by requesting periodic payments.
If you hold your IRA with a mutual fund company, brokerage or unit investment trust, you can instruct it to automatically distribute a fixed amount monthly. Almost all IRA custodians offer this service. You can also instruct the custodian to withhold a portion of the distributions from a traditional IRA to pay income taxes. Roth IRAs normally need no withholding.
Individual Retirement Annuity
An individual retirement annuity is a life insurance contract that pays out periodic – usually monthly -- fixed or variable amounts for a certain period or for life. You cannot forfeit or transfer the contract. A deferred annuity allows you to make flexible payments to the annuity until you begin receiving monthly payments. An immediate annuity starts paying right away, based on a lump sum payment. If you roll your IRA into an individual retirement annuity, you must complete the transaction within 60 days or face taxes and penalties. If you open a deferred individual retirement annuity, your annual contributions cannot exceed the deductible amount for an IRA. You must start receiving your annuity payments by the year after your 70 ½ birthday. IRS Publication 590 provides information about individual retirement annuities.
Substantially Equal Periodic Payments
If you wish to withdraw IRA money penalty-free before reaching age 59 ½, you can apply to your IRA custodian requesting "substantially equal periodic payments" -- SEPP. You can select from three different methods that the Internal Revenue Service has created to determine the amount of each payment under the SEPP exemption. All three methods factor in your life expectancy. You can find the detailed rules in IRS Publication 590. You may receive SEPP annually or monthly – the choice is yours.
Restrictions on SEPP
If you elect early distribution through SEPP, you cannot change the amount distributed for at least five years from the date of the first distribution. In addition, you must be 59 ½ or older when you change the amount. Thus, if you begin receiving SEPP at age 50, you cannot change the payment amount for 9.5 years. If you are 58 when you start taking SEPP, you must wait five years to change the amount, even though you will be older than 59 ½ at that point.
Required Minimum Distributions
If you wait until age 59 1/2, you can take your distributions penalty-free at any frequency and amount that suits you. For traditional IRAs, you have this privilege until you reach age 70 ½, at which point you must start taking required minimum distributions. If you own a Roth IRA, the IRS does not require you to take distributions. The first required distribution for traditional IRAs is due on April 1 of the year following your 70 ½ birthday. You must take subsequent required distributions by December 31 of each year. The IRS specifies the way to calculate the required minimum distribution amount in Publication 590.
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