Individual Retirement Accounts (IRAs) allow you to make withdrawals as you choose, including monthly, annually or randomly as needs arise. Even if you have a company-sponsored pension or 401(k) plan, you can choose to transfer funds to an IRA rollover to make withdrawals as you choose. An IRA can also enable you to receive monthly funds for an early retirement, without facing federal tax penalties.
An IRA allows you to make withdrawals on an annual or monthly basis, or as needed. The IRA enables you to establish a monthly withdrawal schedule, while allowing you access to additional funds for emergencies, such as medical bills or housing costs. If you choose to take monthly payments, your IRA administrator can help you plan your payment schedule based on your life expectancy.
If you have a company-sponsored pension or 401(k) plan that allows you to take a lump-sum payout, you may elect to roll over the money into an IRA. By simply taking a lump sum, without putting the funds into an IRA, you may face tax consequences. Once funds have been rolled over to an IRA, you can choose to make withdrawals monthly, annually or when you need money.
If you roll over money from a company-sponsored pension plan or 401(k) into an IRA, you can also choose to purchase an income annuity. Funds for an income annuity can remain within an IRA. You can use the entire amount of an IRA for an income annuity or just a portion. By putting only a portion of the funds to an income annuity, you can retain access to money within an IRA rollover for emergencies. An income annuity allows you to make monthly withdrawals, based on life expectancy. By keeping the income annuity within the IRA you may also avoid tax consequences, particularly if you receive annuity payments before you reach the age of 59 1/2.
Federal Income Taxes
The Internal Revenue Service (IRS) taxes IRA withdrawals according to your regular income-tax rate. The amount you pay does not depend on the frequency of withdrawals, but rather on your age and how money was taxed before depositing funds into an IRA. If you deposited pretax funds into an IRA, you must pay taxes on the entire amount of a withdrawal, including the original contributions and earnings. If you deposited post-tax funds, you must only pay taxes on money earned through the IRA. The IRS requires you to pay a penalty of 10 percent on all funds withdrawn from IRAs before you reach the age of 59 1/2. This applies to any withdrawal, whether taken monthly, annually or as needed. However, by opening an income annuity within an IRA rollover, you can avoid the 10 percent penalty for receiving annuity payments before 59 1/2 years of age. If you own a Roth IRA, you do not have to pay income tax on any portion of withdrawals made after the age of 59 1/2, as long as you own the Roth IRA for five years or more before making a withdrawal.
- Kiplinger; Taxes on 401(k) and IRA Withdrawals; Kimberly Lankford; May 2008
- Oregon Live; Is an IRA Annuity Right for You?; Brent Hunsberger; August 2011
- CNN Money; Which is Better: Pension or Payout?; Walter Updegrave; November 2005
- Total Return Annuities: IRA vs. Annuity: A Tricky Choice When You Retire