Make Penalty-Free Withdrawals No Matter What Your Age

Despite common belief, you can make penalty-free withdrawals from your IRA. No matter what your age, you can take distributions in a series of substantially equal periodic (monthly, quarterly or annually) payments that are calculated to deplete your account over your life expectancy. How much you're allowed to withdraw annually is equal to the balance of your IRA divided by your life expectancy (or by the life expectancies of you and your beneficiary).

You must take at least one payment per year, and the payments must continue for at least five consecutive years or until you reach 59-1/2, whichever is later. At that time, you can decide whether or not you can keep taking the periodic payments. You'll only be taxed on the payments you receive each year, and your balance will continue to grow tax-deferred. Ask your accountant or banker to help you calculate how much you can take out. You can get life expectancy tables used by the IRS at www.irs.gov or www.irahelp.com.

What if Uncle Sam Gets Your Money?

What if you actually get a check for 80% of your lump sum? All is not lost! Let's go back to our example where you've got a check for $80,000 from your $100,000 pension.

First, put the $80,000 into an IRA. Remember, you only have 60 days from the time you get your check to make this rollover, or you get hit with taxes (and maybe a penalty) on the entire distribution.

Next, you have to replace the $20,000 the IRS took out of your pension plan. Here, in order of priority are the three places where you should look for money:

1. Cash-rich friends and family. Almost any retired person would love to boost their current 4% CD yield. Offer to borrow the money at 7% interest rate—we're sure you'll get lots of takers and that's probably better than a loan rate you'll get at the bank!
2. A collateral loan against your savings. If you have a sizable CD tied up, ask your banker if he'll grant you a loan against the CD, with payment due when the CD matures.
3. A home equity loan. Take out only as much as you'll need, and only if you need a sizeable amount or you'll pay more in closing costs than you will in tax.

Straight Talk Tip: Don't use a credit card cash advance—it's too expensive!

You only need a short-term loan. See, once you replace the $20,000, Uncle Sam owes you money! If you and your spouse are both retired, call your old employer and ask them to send you a copy of your W-2 form—A.S.A.P. (By law, they must give it to you within 30 days.) Then file your taxes early in January to get your money back quickly. Just list the amount that was withheld from your pension on your Form 1040 where it says "other tax withheld through 1099s."

If your spouse is still currently employed, you can start reclaiming your "refund" today. Have your spouse get a copy of his or her W-4 form from personnel, and then increase the allowances claimed by 1 for every $700 withheld from your pension. (For every $10,000 withheld, you would add 14 allowances.) Increasing your allowances will mean your spouse will have less tax taken out of each paycheck. Then change the number of allowances back at the end of the year.

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