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Making a Split Decision on Your IRA

If you take money from your IRA before age 59 1/2, you’ll usually owe income tax plus a 10 percent penalty. You can avoid that penalty by taking annuity-like withdrawals for five years or until 59 1/2, whichever comes later. To avoid trouble during that period, split your IRA in two and take scheduled withdrawals from IRA No. 1, not from IRA No. 2.

You might need more money: You may find out that your scheduled withdrawals don’t provide enough spending money. However, if you take larger withdrawals from IRA No. 1, you will owe a 10 percent penalty, plus interest, on all previous IRA withdrawals. Instead, you can tap IRA No. 2 for the extra cash you need.

You might need less money: You could go back to work or begin to collect Social Security. However, if you stop taking IRA withdrawals or withdraw a smaller amount, you’ll owe penalties and interest.

Fortunately, in Revenue Ruling 2002-62, the IRS announced that taxpayers can make a one-time switch from a high-withdrawal schedule to a minimum-withdrawal schedule. This would allow you to take out much smaller amounts each year and still avoid penalties.