Hello everyone, and welcome back to the retirement planners of America podcast where we try to have more fun than a human being should be allowed to have when talking about all this financial stuff. And this week, we have an absolutely exciting topic, which is how to take distributions from your IRA without paying the 10% penalty. Wow. Who would have thought so we’re going to bring Jeremy into the conversation. So Jeremy, how old are you? I am 40 years old. 40? Yeah. Okay, well, we’re going to make you 50 for this one. Okay, perfect. Okay, so we’re going to pretend that you’re 50 years old. You’ve got a bunch of money in your IRA, okay, and you want to take it out, but there’s this 10% penalty sitting out there, and you don’t want to pay it. Yeah, of course. Now, who wants to pay? Yeah, it’s a lot. It’s big deal. And then you pay the taxes on the on the penalty as well, if you’re under 59 and a half. Yeah, yeah. So 10% is, is a little misleading there. Then it’s even more than it’s even more than that. Yeah. Okay, so I guess my first question is, what is an IRA? What is an IRA? Well, an IRA is an account that you’ve accumulated money in, where you have put it in over the years, and it’s grown either tax free, if it’s a Roth IRA,

which in this case, would not apply to our conversation today, on a Roth IRA, or it’s a traditional IRA, as they call it, which is one where you’ve been putting money in, you’ve been getting your tax deduction for for putting it in, but if you take it out, it’s taxed. And now you’re 50 years old, yes, and you’re saying, Okay, I want to take some of this money out now. I want to retire early, or whatever I want to do, yeah, I want to take it out. And now I’ve got this. I got to wait till I’m 59 and a half. I don’t want to do that. I would take it out now. Now I’ve done really well for myself. I’m retiring at 50 like, this is I’m living the dream, baby, yeah, yeah, absolutely. Okay. So, so is there a way to avoid that 10% or 10 plus percent tax? Yes, yes. Awesome. There actually is, and it’s called a 70 2t provision. Oh, very descriptive. Tells me exactly what, you know, what? That’s it. That’s all I needed to tea. Podcasts over. Yeah, that’s it.

Okay? Explain, explain 70 2t for us. Well, first of all, let me tell you who is, who can use it, right? So this is somebody who’s going to retire early, okay? Somebody who wants a predictable income from their IRA before age 59 and a half. Okay, so it may not even be that you’re retiring. Yes, you just need extra income for whatever reason. That may be. Okay, okay? And thirdly, it’s a bridge between, you know, you’re waiting for your Social Security start. You’re waiting for your pension to start. You’re waiting for other sources of income to start. So it’s kind of a bridge where you can start taking money out of the IRA without the 10% penalty. Okay, yeah, so it doesn’t necessarily have to be retired or anything like that. You could basically anyone that has an IRA, would they be eligible to be able to do something like this? And they just need a little bit extra maybe the wages have gone down, or maybe they’re just want more cash, right? But I like the scenario you created. This is somebody who is now going to, you’re retiring, yeah, you’re 50, and, boom, I’m retiring early, and I want to start getting income out of my IRA, by gosh, absolutely. I want, I want to go out. I want to have some fun. I want to I want to relax. I want to have more fun than a human being should be allowed to have. Man, that’s a great thing. I love that. Yeah, yeah, I do. I do want to do that. Okay, okay, so we know who is going to typically use that. Yeah, explain, explain it. How does it actually work in practice? So as a 50 year old, or actually any age, okay, but I’m using a 50 year old or just to because that’s who our demographic. Most of the people that we work with are over 50. They’re basically the payments.

The 70 2t is basically where you are, what’s called annuitizing the payments out of your IRA. Okay, so the IRA is an individual retirement annuity. That’s what IRA stands for. So the whole idea when IRAs were created was that you accumulated money in this IRA,

and then when you retired, you were going to take an annuity from it. You were going to take an income out of it. So because it’s an it’s an it’s it’s building an annuity. If you’re under 59 and a half and you want to take an annuity, you’re within the rules, okay? So 70 2t is the version of the annuity, the income that you want to receive based on, we’re going to talk in a little bit. But before you’re 59 and a half to avoid the 10% penalty, okay? Because the reason they put the 10% penalty in the first place was because they don’t want somebody, we want you to put this in for your retirement. Yeah. And now, what are you doing? You’re not right. You’re taking it all out before you retired, and we’ve defeated the purpose, right? So basically, the payments have to go for five years, okay, or until age 59 and a half, whichever is the longer, okay, okay. So if you’re 57 it has to go to.

You’re 62 Okay, all right, if you’re 50 it has to go till you’re 59 and a half, which would be nine and a half years. So it has to go at least five years, or until you’re 59 and a half, whichever is the longest. And if you’re 50 years old, you know, as I said, it means that it’s nine and a half. Now there’s another rule, and that is that you cannot stop, change or alter the method that you’re chosen to take the annuity, okay? Because so once you choose that’s it. If you choose a method, and there’s three of them, yeah, and if you choose that method, then you have to abide by it. If you decide to change it, stop it, not abide by the rules, then they retroactively go back and collect that 10% penalty on you. Ooh, yeah, that’s rough. Yeah, they’re not nice. I guess this is a nice Sure, but it comes with a lot of not nice. Yeah, yeah, there’s a lot. There’s a lot of strings attached to it. Who would have figured a government agency putting strings on your money that you want to take out? Right?

They would never do that. Why would they do that? Yeah, they only have good faith. Okay, so we kind of know what we want. We have three different methods. Could you describe basically the the three different kind of methods that we could choose if we if we wanted to take that money that we have to stick with the taxes. So basically there, yeah, there are three methods, but I can tell you that most of the time we choose the first one, okay, okay, so it’s kind of, if we’re going to do this, that’s most likely the one you’re going to use. The other two are kind of esoteric. They in very rare circumstances. Are they better? But there are three methods. Okay, okay, so the first one, which is the favored one, is the required minimum distribution method. So basically, what we do is we look at what is your required minimum distribution based on your life expectancy, right? So the required minimum distributions are due for people, you know, in their 70s. But in this case, we’re saying we want to start those when I’m 50. Okay, okay, so it’s based on your life expectancy. And so it’s a calculated thing. They give you a table, and you look at the table and it tells you this is how much you can take out and satisfy that. And the idea behind the required minimum distribution, as we’ve talked about in other podcasts, is that, basically, they wanted to avoid that you’ve accumulated all this money in your IRA, and then the opposite of what we’re talking about, and you never touch it, yeah, you never take the money out. And they never collect their taxes. They have to get their due. Oh my No, we cannot have that. So they’ve created the required minimum distributions, but in this case, it’s going to help us, because we can calculate by their table what your lifetime expectancy is, and then this number gets recalculated every year as to how much you need to take out. Okay, okay. Now the good news is that once you’ve satisfied those five years, you can stop all this so you don’t have to do it for the rest of your life. Yeah, okay, but you do have to do it at least until you get to 59 and a half or five years if it goes beyond that, right? So required missing distributions usually is the lowest and most flexible

income stream, okay, so then

you can go to the amortization method. Basically, this is like a fixed annuity. So if you go and you get an annuity payment, so if you give an annuity company, I don’t know, $100,000

and you say, I want to get an income for the rest of my life out of that, okay, well, what they do is they give you the income based on a certain interest rate and principal, okay, they give you a combination of the two, yeah. So it sounds like you’re going to get this really high income, but really what they’re doing is they’re paying you interest and they’re paying you back a piece of your own money, okay? And the combination could be like Seven 8% but really you’re getting 3% interest and 5% is just repayment of your own money, yeah, but it sounds really good, and a lot of people buy these things, so, but that’s basically amortization, gotcha, it’s guaranteed income, essentially or somewhat, anyway, exactly. So it’s an amortization method, and this gives you a little bit higher income. So it depends what you’re looking for. Okay, you know. So if you want the highest income versus the lowest income, you know, depending on what you want. But these are set in stone, so you have to kind of accept what the income it’s going to give you is, right? You don’t have flexibility on, you know, changing these. So the amortization uses your life expectancy based on your life expectancy. We’re going to pay you back, you know, a little bit at a time of your own money. That’s, that’s in the IRA, and then the difference is this interest rate that they give us, the IRS gives us, and then that gives you a principal and interest payment and amortization schedule. Interesting, yeah, okay. And that’s based off of, again, life expectancy. All these, all of these are, yeah, yeah. And, you know, you just made me think of very interesting

in.

Very interesting. Yeah, now nobody gets this reference unless you’re of a certain age. But that’s from laugh in, yeah,

listen, I’ve heard daddy and Dennis. Yeah, that was from laugh in. And probably you weren’t born with laughing design, so even though you’re 50, yeah,

the new me, the new me is that old, actually, okay, all right. So required, minimum distribution.

We have amortization and what’s the third one? The third one is just a straight up annuitization method, okay, okay, so basically, what they do here, it’s a, it’s, it’s a fixed amount, okay, the first one was, variable is recalculated every year, right, right, based on your life expectancy and the values and the numbers that the IRS gives us. This one is where it’s fixed. They give you a number. It’s it’s very straightforward and easy to calculate. Because it’s a it’s a factor. You multiply it by the side the amount you have in the IRA, and that’s the income you got to take. Gotcha. So it’s very straightforward. There’s no variability, nothing. And it tends to give you a similar income to the amortization, okay, okay. Method, yeah. So the the one where it’s the least amount of income is the RMD, the amortization is the highest, and then the, I’m sorry, and the annuitization is similar to the amortization method. Gotcha. So depending on what your goal is, if you want to get the maximum, the least amount, because, remember, when this is coming out, yes, it’s not, you’re not subject to the 10% penalty, but it is income taxable to you, of course. Yes. So depending on your circumstance, you may want the highest income the lowest income, and you make your decisions accordingly, indeed, and you want to avoid, you know, likely want to avoid, jumping into, like, a higher tax bracket, potentially, or something like that. Yeah, okay, okay, so even if you have another income coming in things like that, so it’s like all these things, talk to a professional. Talk to your your financial planner, your tax people, all those kinds of no Jeromy, talk to us. Well, right? We do those things. Yes, we do. That’s fantastic.

Okay, all right, so we have the three different methods. You kept mentioning, these interest rates that the IRS is giving us. Are those variable like, what interest rates are we getting from the IRS there? So

that’s where this kind of gets interesting, okay, because there’s leeway in terms of the interest rate that you’re going to use, okay, okay, so, but it’s based on the federal funds rate, okay, so whatever the Federal Reserve says, this is the interest rate, it’s based on that, and the amount of the interest that you can assume in your calculation is cannot exceed 120%

of that number. Okay, so if you want to get a higher income, you want to use the higher income interest rate level. If you want to get a lower income, you use the lower interest rate level. So you have flexibility in terms of planning by doing that in both the amortization and all three of the methods that we talked about. And so that also gives you some flexibility in terms of how you construct this. Because, you know, not everybody wants to get the highest amount. Yeah, you know, somebody may say, I want to get, you know, $1,000 a month. And so the highest, maybe you could get 1500 or 2000 and be stuck with that. But I don’t want to do that, because then I’m getting I’m taking too much out, and I’m paying taxes on all of that, and I don’t want to do that. Yeah, right. So this can give you the range, and you can kind of move the levers up and down to figure out, you know, where’s the income that you want for the least amount of tax that you want to pay, and is that, is that interest rate set in stone when you begin it, or is that one change year by year. The only one that changes year by year is the required minimum distribution. That one changes each year. Yeah, gotcha. Okay, all right. Very interesting. Okay, so can you? Can you basically give us an example of maybe me being 50 years old and a balance and kind of interest rates and what I can expect likely to to get from this. Yeah. So for a 50 year old, for you, yes, yes. For me, the pseudo, the pseudo 50 year old, yeah.

And let’s say that you have an IRA with $1 million in it. I’m loving this already. You love it already. I’m doing great at 50, yeah.

And so you want to use the amortization method, okay, okay. And as we record this, the annual withdrawal amounts that you could take would be somewhere around 40 to $50,000 per year. Okay. Now, of course, that’s going to change based on the interest rates and your life expectancy at the time that you do it, but right now you can assume, potentially, it could be somewhere in the range of 40 to $50,000 a year that you could take out of a million dollar IRA and not pay the 10% penalty. Okay? Now again, remember, you will pay income tax on that on that income, right? But you won’t pay the 10% penalty. Yeah.

Yeah. That’s.

That’s great, avoiding avoiding the penalty.

Still have to pay the taxes. Uncle Sam’s got to get his he always does. He

makes sure okay. So what are some pitfalls or real issues that people can find themselves getting into with this type of withdrawal before, basically retirement. This is a great question, because going into this, you have to be very aware, okay, of what you’re getting into, yeah, because this is, there are a lot of rules here if you modify the plan early, okay, meaning, let’s say that you miss a payment. Oh yeah,

you miss a payment. It retroactively goes back to the beginning, and 10% penalty is applied to all the prior distributions, plus interest. Ooh, no. Grace Period, then no and, you know, they figured that they missed out on what they could have invested the money at and whatever interest they could have made. So therefore they’re gonna make you pay it. Yeah? So they’re, they’re actually,

I mean, in a way, they’re right, because they lost out on the money they could have gotten, because now you violate so do not miss a payment. Yeah, do not increase the amount you’re taking out because you need more. Do not decrease the amount you’re taking out because you need less. Do not stop making the distributions. Like you’re three years in. You’re like, I don’t need the money more, and I’ve stopped. Do not roll this over into another IRA.

It’s got to stay where it is, okay. And then lastly is, don’t change the method. You know, don’t add money to this IRA. Make no changes to it. So because of that, what we sometimes do, let’s say, in the example that we had, that you have this million dollar IRA, right? So maybe you don’t want to get 40 or $50,000 a year. Maybe you just need 20,000 Okay, so instead of having this one IRA. We split it, okay? And we take the million dollar IRA and we split it in half, and we now have a $500,000

IRA, and we’re going to take the 72 distributions from that $500,000

IRA, and now your income is 20, $25,000

you know, depending, yeah. So again, you can manipulate the amount you’re going to get also by segregating them, yes, and so you have one where you’re it’s not touching it 59 and a half. It’s as usual. But you have this one over here where you’re going to get the distributions out of it without the 10% penalty. So that’s an additional layer of planning, yes, that you can think about. And we could, we could, if we separate them out. In that instance, let’s say I decided I want to go back to work. I get bored. I don’t want to be at the house anymore, you know, I’m going to go back to work and then a search. Re contributing to an IRA. I could do it in the one that’s set aside, that’s not being touched. We’re not pulling anything from it. I wouldn’t be harmed in this way. That’s right. And we actually call it a 70 2t IRA. Now, yeah, we segregate it. We call it that, so we know you cannot do anything to this one. It’s cast in stone for five years, or until you’re 59 and a half, whichever is the longer, yes. Now, once you turn 59 and a half, then you can stop. You can change. You can do whatever you want after that. Yeah, but beforehand, you got to abide by the rules. Otherwise, the penalties will apply. Yes, yeah, I don’t want any of those, okay? So we haven’t set it up. We’re basically setting them up for being as flexible as possible, which is completely inflexible until you meet those minimums, right? The five years or 59 and a half.

What’s what’s the end all be all, okay, you’re thinking about it, you need the money, or you’re planning for it in the future. What should someone really hone in on for? Like, a key point to take away at the end of this video here? Well,

this is totally self serving, but the key takeaways I would take from this is, don’t do this by yourself at home. Okay, it’s complicated, and if you do it incorrectly, the penalties are 10% plus the tax on the 10% it’s not worth it. Talk to a professional, do it right, set it up, and then make sure that that professional keeps you on track, and make sure that you don’t go awry of the rules, and if you do that, you should be okay. Love it. Thank you very much again. Well, you’re very welcome. Thank you for a wonderful set of questions that was very interesting. So ladies and gentlemen, that’s our podcast this time. I hope you enjoyed it as much as we enjoyed making it for you, and hope it finds you healthy, wealthy and wise, and we’ll talk soon.

You.