Tap IRA Tax-Free

Today TaxMama hears from Lea in NY who wants to know. “You mentioned somewhere that it’s possible to get money from my IRAs tax-free, instead of paying about 40% in taxes and penalties for early withdrawal. How does that work.”

Hi Lea

If I have someone who really needs to be able to draw from their retirement plans, this is what I have them do. It’s a little complicated – but it’s certainly worth the trouble.

1) If you’re presently employed and you have a lot of money in that employer’s retirement account – borrow from it. You can borrow half the balance up to $50,000 without tax consequences. And you can pay it back over several years

– as long as you stay employed at that company.

Of course, if you leave, you have to pay it back – or pay taxes on the un-repaid balance.

2) If you don’t have money you can tap from your current job, but have a lot of money in IRAs that you’ve saved up, or rolled over from previous jobs –

Start a business – anything that will allow you to generate a couple of thousand dollars (or much more) in sales the first year. You don’t have to quit your job. You can start the business on the side.

Set up a solo-401k plan. If you’re married, set one up for your spouse, too, as joint owner of the business.

Roll over your existing IRAs and/or 401k accounts from previous employers. (You usually can’t do it with funds from an existing employer.) Then borrow from the account(s).

Again, you can each borrow half the balance in your accounts, up to $50,000 without tax consequences. And you can pay it back over several years – as long as you stay employed at that company. And you’re not apt to fire yourself. All you have to do is stay in business until you pay the money back.

Sure, it will cost a couple of hundred dollars a year. But that’s a LOT less than paying about 40% worth of taxes and penalties on the IRA withdrawals.

There is a side-effect. If you do start a business – and you take it seriously, you’re apt to make extra money. Probably more than enough to pay back the loan. Possibly, enough to solve all your financial problems. Perhaps you might even earn enough to get rich! It’s all up to you.

And remember, you can find answers to all kinds of questions about tax-free IRA withdrawals and other tax issues, free. Where? Where else? At TaxMama.com

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