Published September 26, 2012
Dear Dr. Don,
In six weeks I will be losing my unemployment benefits. I own a home that has a mortgage of $170,000. My monthly payments are $1,300 for the mortgage and taxes. I owe $38,000 in credit card debt. I have $10,000 in medical debt. I have $60,000 in an individual retirement account and have no other savings. I do get $793.25 from a pension from my deceased husband.
I am 57 ½ and worked at my former employer for 14 years, but now no one will hire me. Where do I go to find out what I should do? I want to keep my home and pay my bills. I hear you can take out an amount every month from your IRA and not trigger the 10% early withdrawal penalty. I can't find anything out there that is in plain English on how you do this. Please help me try to figure this out.
-- Justine Juncture
You're in a frustrating situation: still willing to work, but unable to find a job. And you want to stay in the family home but are overwhelmed by bills and the anticipated loss of your unemployment benefits.
I'm not sure that tapping your IRA is the answer, but you can take "substantially equal" periodic payments out of your traditional IRA before age 59 ½ and avoid the 10% early withdrawal penalty tax. This is called a 72(t)/(q) distribution, named for the section of the Internal Revenue Code that defines it.
There are three different ways to calculate the distributions for these annuity payments: the required minimum distribution method, the fixed amortization method, and the fixed annuitization method. Bankrate has a calculator on its website that will estimate the payments using all three methods, but there are enough moving parts that you'd want to get the distribution amount confirmed by a tax professional before taking your first distribution.
The bottom line is that the annuity distributions aren't going to be enough to dig you out of this financial hole. My guesstimate -- and it's only that, since I am not a tax professional -- is that you'll get somewhere around $2,500 per year or $208 per month. That's just not enough to balance the monthly budget.
For other withdrawals, you should be in a low enough tax bracket that the 10% penalty tax, while expensive, won't be the driving force in determining how much to take from your IRA. Just don't take out so much money that you put yourself into a higher tax bracket.
You may be able to keep juggling your financial commitments with distributions out of the account until age 60, when you can, if eligible, file for Social Security survivors benefits on your husband's work record. I'm assuming you don't have children younger than 16 at home, or you'd already be receiving survivors benefits. If you don't qualify for survivors benefits, then you're trying to hold on until you can file for Social Security benefits on your work record at age 62.
My concern is that you'll spend out this IRA money making minimum payments on your credit cards and medical debts and making the mortgage payments, and you'll wind up postponing the eventual need to either sell your home or declare bankruptcy.
I'd suggest putting together a budget and seeing if you can get comfortable with what you need to do to preserve the status quo. Pay for a few hours of a financial planner's time for a consult if you're uncertain about how to make this work.
It's likely to be too late in your unemployment claim to take advantage of a federal government program for unemployed homeowners called the Home Affordable Unemployment Program, or UP, which can reduce your mortgage payments to 31% of your income or even suspend them altogether for 12 months or more.
But it's worth a call to your mortgage servicer to ask. UP is not currently available for homeowners with mortgages held by Fannie Mae and Freddie Mac, though both of those agencies have their own forbearance arrangements for unemployed homeowners.
Contact your mortgage servicer to see if you are eligible, or talk to a housing counselor approved by the U.S. Department of Housing and Urban Development.
Don't give up hope on finding a job. But even if you don't find work, try to plan to meet your goals with or without an IRA early withdrawal.
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