Jan 22

My husband wants to cash in two IRAs that are earning very low interest. He will use the money for buying a house to fix up for rental. Would it be best to do this or to take out the minimum amount and cash in regular CDs which have not matured?

Also, does the date the IRAs were purchased matter? Other smaller IRAs were combined with these about a year ago – could that be a problem?

Thanks for your help!

6 comments so far...

  • sassy2 Said on January 22nd, 2010 at 8:12 pm:

    there is no penalty at age 71. What there is are taxes. Federal and State taxes at the high rate so you could actually end up paying 50% of the money to the tax man. Talking to the administrator of the IRA and get the actual figures.

  • shipyard60 Said on January 22nd, 2010 at 8:27 pm:

    It is a matter of tax rates, he may want to spread the income over a few years but he must take the minimum out. If he doesn’t take out enough he will pay a 50% penalty.

    The IRAs may be in something like a CD which might not be mature. Since he is over 59 1/2 he won’t have penalties only the taxes.

  • Lauren F Said on January 22nd, 2010 at 8:56 pm:

    There is a minimum amount he must draw out after reaching age 70 1/2. It is called the required minimum distribution. If you don’t take out at least that amount, you are subject to a tax penalty of 50% of what you should have taken out. For example, say the RMD table says you were supposed to take out 5% of a $100,000 IRA (or $5,000) but you only take out $1,000. You will have to pay a penalty of 50% of the $4,000 difference, or $2,000.

    Any money you take out of these is taxed as ordinary income, and could make your social security payments subject to taxes as well.

    I personally would take the minimum amount (to meet the IRS requirement and minimize my taxes without penalties). To do the rest of the financing, don’t cash in unmatured CD’s – too much penalty there. Instead, get a conventional mortgage, or take a loan out against the CDs (called a secured loan) in which you pay 2% or so above the rate the CDs pay. Then when the CD’s mature, you withdraw the funds and pay off the loan. If you are doing this as a rental business, you can deduct the cost of the loan against your Schedule E income.

    There is a great website (www.irahelp.com) with good advice on how to maximize IRA values, particularly in how to designate beneficiaries and inheritances to stretch out the value of these.

  • Ralph T Said on January 22nd, 2010 at 9:28 pm:

    He can draw from the IRA’s without paying the penaties because of his age,just state and federal income taxes.
    He can also make withdrawals for specific purposes and not have to put the money back in.

    I suggest he talk to the administrator of the plans or financial planner.
    He can always move funds around in order to get better returns on his investments.

    If he has not started making minimum withdrawals from the IRA’s he will need to do so before the government hits them with penalties that could wipe them out quick.

  • StephenWeinstein Said on January 22nd, 2010 at 9:28 pm:

    Generally, there is no maximum and you can withdraw all the funds at age 71 without penalty. There are two exceptions:

    1. If you converted a traditional IRA to a Roth IRA recently (within the last 5? years), special rules apply to the conversion amount.
    2. If you previously used the rule that allows you to withdraw substantially equal amounts each year over your lifetime without penalty, then stopping that practice too early has consequences.

  • Judy Said on January 22nd, 2010 at 10:16 pm:

    There’s no penalty on an IRA withdrawal, no matter how much you take out, if you’re over 59-1/2. You do have to pay income tax on the withdrawal though.

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