Money Secret: How to Create a Vacation Fund Right From Your IRA

Available for Interviews: Harry Abrahamsen

Harry J. Abrahamsen is Founder & CEO Abrahamsen Financial Group. His company offers customized wealth management solutions—creating plans and portfolios that protect, preserve, and grow client’s wealth. He was selected as one of the ten most dependable Wealth Managers in the Mid-Atlantic as published in Forbes magazine.

 

What Harry Abramhamsen can say in an interview about
How to Have an Annual Vacation Using a 72 (t) Distribution:

Going on vacation is great. Vacations create lifelong memories. Going on vacation every year is a dream come true. One way to create an annual vacation budget that doesn’t come out of your pocket or annual budget is to look at your IRA. Most people will say their IRA is for retirement, so how can it be used for a vacation?

The Secret

The rules for 72(t)/(q) distributions require you to receive Substantially Equal Periodic Payments (SEPP) based on your life expectancy to avoid a 10% premature distribution penalty on any amounts you withdraw. Payments must last for five years (the five-year period does not end until the fifth anniversary of the first distribution received) or until you are 59-1/2, whichever is longer. Further, the SEPP amount must be calculated using one of the IRS approved methods which include: 

  • A person can implement a 72 (t) (q) distribution. The Internal Revenue Code sections 72(t) and 72(q) allow for penalty-free early withdrawals from retirement accounts.
  • The fixed amortization method: With this method, the amount to be distributed annually is determined by amortizing your account balance over your single life expectancy, the uniform life expectancy table or joint life expectancy with your oldest named beneficiary. This way you have an specific annual budget.
  • The required minimum distribution method: The annual budget will vary year to year depending on the account value. This is the simplest method for calculating your SEPP, but it also typically produces the lowest payment. It simply takes your current balance and divides it by your single life expectancy or joint life expectancy. Your payment is then recalculated each year with your account balance as of December 31st of the preceding year and your current life expectancy. This is the only method that allows for a payment that will change as your account value changes. Even though this may provide the lowest payment, it may be the best distribution method if you expect wide fluctuations in the value of your account.
  • No tax penalty. The money will be taxed at ordinary income rates, but there will be NO 10% early tax penalty.
  • The IRS calculation is not too high. It is enough for a vacation, without sacrificing your retirement. The IRS limits how much can be withdrawn by assuming any future earnings will be at most 120% of the Federal Mid-Term. This conservative approach can help assure that you will not prematurely deplete your retirement account.

 

Interviews: Harry Abrahamsen

Harry J. Abrahamsen is Founder & CEO Abrahamsen Financial Group. He has been quoted in numerous national publications, such as Forbes, On Wall Street, Financial Planning, Bottom Line Personal, Smart Money and cited in the Encyclopedia Britannica. An independent research firm has selected Harry James Abrahamsen as “The 10 Most Dependable Wealth Managers in the Mid-Atlantic” published in the Forbes December 2007 issue Investment Guide. Harry Abrahamsen has five children and resides in New Jersey.

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