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Editor’s note: Dan Moisand answers reader questions on all things retirement every Friday. If you have a question for Dan, please email him at RetireQA@marketwatch.com.
You can get money out of retirement plans like 401(k)s and IRAs before age 59 1/2 but the rules differ depending on which type of account you are making distributions. This week, I cover some basics of making early withdrawals from retirement accounts.
Q. Dan, I am a 39 years old federal law-enforcement officer who will be eligible for retirement at age 50 but plan on remaining with my agency until age 55. I have been investing the max (currently $17,500 annually) into my government Thrift Savings Plan (TSP) account since age 26. The agency matches an additional $3,000 a year, totally $20,500 with my original investment. I am on a pace to retire by age 55 with at least $800,000 in my TSP. At that point I would like to roll over my account to an IRA. However, the latter doesn't allow withdrawals without penalty until the age of 59 1/2. From age 55 until age 59 1/2 I would like to withdraw the interest/dividends earned off my IRA investment. Is this possible or must I wait until age 59 1/2? — K.T.
A. K.T. congratulations on doing such a great job of saving. That discipline should serve you well.
Once you retire, you can take whatever you want out of these accounts whenever you like. The issue isn't accessibility as much as it is taxability. You can get to the money but if you are not careful you could pay a lot of money in avoidable tax penalties.
The easiest way to avoid the 10% penalty for early withdrawals is to leave the funds at the TSP and only rollover to an IRA once you reach age 59 1/2. Based on the above you will be old enough to utilize the exemption from the penalty for those who separate from service after age 55. The TSP has only a few options for your investments. As limited as your choices are, the TSP options are better than those in most 401(k)'s I've seen over the years and dirt cheap.
If you really do not want to leave it at the TSP, you can avoid the 10% penalty on early distributions from an IRA if you employ one of the Substantially Equal Periodic Payment (SEPP) arrangements, aka as a 72t arrangement. None of the methods will jibe with your desire to only distribute interest and dividends. This is another detail that points toward keeping the money at TSP until 59 1/2. Keep in mind that if you go the SEPP route, you will need to stick to the arrangement for the longer of five years or until age 59 1/2.
As for your desire to just draw interest and dividends, many people would like to do this. It sounds very safe. Well, it is and it ain't. By its very nature, you should always have some level of nest egg if you do this. So in this sense, it is safe. However, interest and dividend levels can be quite volatile, so from a steady cash flow perspective, it is not a safe approach.
Q. This year I was faced with a divorce. Unexpectedly. I am 62. At FRA I
will be able to collect
one half of what my ex-husband collects on his Social Security. He is 71 and has been collecting his
SS since he turned 65. Can I collect the reduced amount of my own SS benefit now, and switch to the full benefit based on his SS when I am FRA age or later? If I delay, will this benefit go up? I think a lot of women or men might want to know this. Thank you — V.L.
A. It works basically the same as it would have had you not gotten divorced. Because you are not yet to your FRA, if you claim any Social Security benefits, you are automatically deemed to have started your own retirement benefit and any spousal benefit to which you may be entitled, all permanently reduced due to the early start. Each month you delay, up to your FRA, the higher your payments will be. Spousal benefits do not receive delayed credits for delaying past your FRA.
Q. Hi. Question for you. My wife is 65. I am 62 and was the higher earner. We plan on her starting to receive SS when she turns 66 next year. She will receive $738 monthly per SSA. I plan to begin SS in 4 years (
$2200) when I turn 66. Is it correct that she will qualify to receive 50% of my benefit at that time? Or would she receive a higher % since she will be 69? If I claim spousal benefit based on my wife's SS next year when I am 63, can I later claim my own full SS benefit ($2200) three years later when I turn 66? Or would I be forever stuck at a % of my wife's lower SS? Thanks. — Don
A. In order for your wife to receive a spousal benefit, you must have filed for your own retirement benefit. Because you are not yet to your FRA, you do not yet get to choose between your own retirement benefit and a spousal payment. That option exists only once you reach your FRA. If you claim prior to your FRA, you are automatically deemed to have started your retirement benefits early. Her benefit is so much smaller than yours, if you claimed now, you would not receive any spousal payment.
Once you reach your FRA, you can file a restricted application and get a spousal payment off her record of half her Primary Insurance Amount (PIA) which is her retirement benefit at her FRA or $369 in your case (half of $738). This allows your retirement benefit to earn delayed credits up to your age 70.
In lieu of a restricted application, you could file and suspend your benefit. Here you also earn delayed credits but your wife would be able to draw a spousal payment that would boost her check to 1/2 your PIA or $1,100 for a $362 increase over the $738 she was drawing. The exact amount of your PIA will dictate whether a restricted application is better than choosing to file and suspend though the difference isn't much based on your description.
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Dan Moisand's comments are for informational purposes only and are not a substitute for personalized advice. Consult your advisor about what is best for you.
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