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IRA WITHDRAWALS

You have to be old enough to take money out of your IRA, but you don't have to retire first.

The first things you have to know about withdrawing from your tax-deferred retirement accounts are the magic numbers. One is the otherwise unmagical 59 1/2. That's the point at which you can begin to take money out of your account without paying a penalty.

Being eligible at 59 1/2 doesn't mean you must start withdrawing then: You can wait until you actually retire — at 62 or 65 or 68 — or until you're ready to add a source of income to your budget.

The only restriction is that you must begin withdrawing from a traditional IRA by April 1 of the year following the year you reach 70 1/2. In fact, you must take at least the minimum required withdrawal, based on your life expectancy and the value of your account, in every year from then on.

If you have a Roth IRA, you don't have to set up a withdrawal plan, or make withdrawals at all, for that matter, if you don't need the money. On the other hand, since Roth withdrawals are tax free, you'll have to weigh whether it might make more sense to use that income rather than to sell investments in taxable accounts on which you might owe capital gains tax.

WHAT YOU HAVE TO TAKE

The rules on withdrawing from a traditional IRA are specific and much more simple than they used to be. Basically, you divide your account balance at the end of the previous calendar year by a number linked to your age. Those numbers are available in tables the IRS provides in Publication 590, "Individual Retirement Arrangements." You can download a copy at www.irs.gov.

Everyone of the same age divides his or her account value by the same number, with one exception. If you name your spouse as beneficiary, and he or she is more than ten years younger than you are, you can use a different table, which uses a longer life expectancy and requires a smaller annual withdrawal.

If you don't withdraw, or take less than you should, you are vulnerable to a 50% penalty on the amount you should have taken but didn't.

THE TAX BITE

The tax you owe on your traditional IRA withdrawals is figured at your regular tax rate. That's why some experts advise keeping investments you expect to grow in value, such as higher-risk stocks and mutual funds, in regular taxable accounts. You don't owe tax on any increase in their value until you sell, and if you've owned them for more than a year, you owe tax at the lower capital gains rate. If your taxable investments are worth less when you sell them than they were when you bought them, you can use the capital loss to reduce other capital gains and even some ordinary income.

You may also want to consider whether to hold dividend-paying stocks in your taxable accounts if the dividends qualify to be taxed at your long-term capital gains rate. Most domestic stocks do qualify, and so do some distributions from certain mutual funds.

TAKING IT EARLY

The government has done you — and itself — a favor by adding more exceptions to the rule against early withdrawals from your IRA. It won't cost you a 10% penalty if you take money out of your IRAs to pay higher education expenses, put money down on your first home, or support your family while you're disabled.

But you will owe taxes at your regular rate, giving the government added revenue. For example, a couple in their 40s who withdraw $100,000 from retirement accounts to pay their child's college expenses could owe more than 45% of the withdrawal in combined federal and state income taxes.

Before you make that choice, you might compare what it costs to take a home equity loan, with its potentially tax-deductible interest, to the tax bill that comes with taking money out of your IRA. It may turn out that borrowing costs less. Another alternative is to tap your employer sponsored retirement plans, by borrowing from your 401(k) or similar account. While the amount you can borrow may be limited, the interest you pay goes back into your account, helping to offset loss of potential earnings.

When It's Safe to Withdraw from a Traditional IRA

EARLY WITHDRAWAL WITHOUT PENALTY

There is one way to get access to the money in your IRAs before you're 59 1/2 and avoid the potential 10% penalty. That's to annuitize your distribution. It means you establish a withdrawal plan that pays you, each year, a fixed amount of the money in your IRA, based on your life expectancy. The chief restriction is that the plan must cover at least five years or all the years left until you reach 59 1/2, whichever is longer. Annuitization does have drawbacks, though. If what you really need is a large amount of money, you probably won't get it this way unless you're close to 59 1/2. And you're using money that was intended for your retirement, so you're depleting, not adding to, your savings.

Disclaimer: This information is provided with the understanding that the authors and publishers are not engaged in rendering financial, accounting or legal advice, and they assume no legal responsibility for the completeness or accuracy of the contents. Some charts and graphs have been edited for illustrative purposes. The text is based on information available at time of publication. Readers should consult a financial professional about their own situation before acting on any information.