Help a reader with a retirement question
Susan, an extremely fanatical reader of Clever Dude (chuckle), emailed the following question to me. I had to respond that I am not a certified financial anything, so I wouldn’t feel comfortable giving this advice:
I am about to retire at the age of 55. I plan to take money from my retirement fund with TIAA CREF to pay off my debt. I have been told that I can take the money out without penalty, if I put it into an IRA “for the benefit of myself” (not directly in my name). Is this true? Also, will I be able to use the money as I like, i.e., to pay off my debt. Also, will I be taxed on the money that I use and will I have to pay a penalty?
I do plan to add more money from my next job to my retirement fund. Could you please advise me on this, as I plan to retire within the next four months.
I don’t have the answer on the penalties, but I do have an opinion on the whole matter. I don’t know how much debt or savings we’re talking about here, but at age 55, unless you have some other support mechanism set up, you probably shouldn’t mess with your retirement accounts.
If your debts are too much to handle, can you sell or downgrade some of them? For example, if you have high credit card debt, can you sell off some stuff to pay it down? Can you sell an expensive car and buy something cheap and economical?
Again, I don’t know the numbers here, but big problems require big solutions. If you’re worried about paying the mortgage, the last step would probably be to sell the house and rent a room with someone. It’s easier said than done, but if you really can’t pay the bills as well as you would like, either you need to:
1) Make more income
2) Live more frugally
3) Destroy some debt
You’re asking about using retirement funds to solve #3, but can you do #1 and #2 to fix #3 first?
Does anyone else have other advice? Can you answer the penalty questions?
Yes, you can rollover you TIAA/CREF 403(b) to an IRA. The title of the account will be XYX Company as custodian FBO (for the benefit of) the Mary Jones IRA.
If you take funds out of this IRA before age 59 1/2 you will pay an IRS pemalty of 10% and be taxed at ordinary income rates.
The only way to avoid paying the penalties would be to take distributions under regulation 72(t) whereby you establish a payout of “Substanially Equal Periodic Payments” (SEPP) using different options under the code. If you take payments on a schedule under 72(t) you will create a schedule of distributions that replicate what you would take as if the payments were spread over you life expectancy. However, you would only do this schedule until age 59 1/2 when you could then take payments at any rate you want. This is a method to eliminate the 10% penalty not avoid paying the ordinary income tax.
Intuitively, I have to think there is a better way to achieve your goal. Consult a tax or financial advisor.