If you’ve lived your entire life receiving a monthly paycheck and budgeting accordingly, the idea of losing monthly income can be a frightening part of retirement planning. While some retirees purchase annuities – products that pay a fixed amount each month, regardless of the market’s performance – others choose to manage their own funds, receiving IRA distributions as they need, not as monthly income.
IRA Distribution Basics
Once you reach the age of 59 1/2, you can access funds in your traditional IRA at any time you choose without incurring a penalty. If you need money before you reach this age, the Internal Revenue Service assesses a 10 percent penalty for early distribution. Because contributions to your IRA were made on a pretax basis, you deferred taxation until you receive a distribution, either qualified or early, and the IRS taxes all distributions as ordinary income. You can make these distributions monthly, annually or as needed, depending upon your financial circumstances.
IRA Rollover to Annuity
If you’re concerned about outliving your retirement plan or mismanaging your IRA early in retirement, you can choose to roll your IRA over into an annuity. Because the IRS allows investors to roll over tax-deferred IRAs into annuities while maintaining your tax protection, you can roll over the entire amount of your IRA, then receive annuity payments as taxable income. Alternately, you can cash out your IRA, pay income taxes on the distribution – which might be steep if it pushes you into a higher tax bracket – and then receive annuity payments without taxes.
Consult Your Broker
In many cases, the custodian who manages your IRA will offer a system to make routine distributions from your account. Contact your broker to determine if you can arrange for scheduled distributions, and if so, if options are available to help manage income taxes when you receive the distribution. Even if your custodian doesn’t offer a program of scheduled distributions, you can still manually make the distribution at any time you choose.
Substantially Equal Periodic Payments
If you must tap your IRA before you reach retirement age, and don’t want to take an early distribution penalty, you can elect to receive periodic payments from the account. In this situation, your broker estimates your lifespan, then amortizes the IRA’s estimated value, dividing it into equal payments for the remainder of your projected life. Payments are taxed as ordinary income in the year you receive them.
- IRS: Publication 590 - Traditional Individual Retirement Arrangements (IRAs)
- Oregon Live: Is an IRA Annuity Right for You?
- Kiplinger: How Annuities Are Taxed
- Fidelity: How to Take a Pension Payout
- IRS: Topic 410 - Pensions and Annuities
- IRS: Retirement Plans FAQs Regarding Substantially Equal Periodic Payments
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