Investment Updates
SEPPs From An IRA: Don't Change Horses Midstream
Published Monday, December 10, 2012 at: 7:00 AM EST
Suppose you have a major financial obligation looming on the horizon—higher education expenses, a wedding for one of your children, or a medical procedure that isn’t covered by insurance. If coming up with the cash is a concern, you may need to think outside the box. One option is to tap your traditional IRAs.
Before we go any further, remember that an IRA is designed to help provide income during your retirement years. A decision to raid your retirement plans early shouldn’t be made lightly. If you do choose this course, however, you can sidestep a costly tax penalty by taking “substantially equal periodic payments” (SEPPs) from your accounts, as long as you meet the requirements spelled out in the tax law.
Any distribution from a traditional IRA is taxable at ordinary income tax rates to the extent that it represents deductible contributions and earnings. To make matters worse, you could be slapped with a 10% tax penalty on the taxable portion of a payout received before age 59½, on top of the regular income tax you’ll already owe. But there are a few key exceptions to the penalty included under section 72(t) of the Internal Revenue Code.
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