Yes, I know this is Officially Not Recommended Financial Planning

November 30, 2010 9:35 PM

I'd like to cash out a Roth IRA and make those funds available to my parents. But because early withdrawal is a No Good Terrible Bad Idea, I can't find much specific advice on the subject. I don't have a financial planner right now. You are not my financial planner, but perhaps you can help me check my work in figuring out the ramifications?

Years ago (likely despairing that I would ever get a real job with my BA in English) my father set up a Roth IRA for me (through Schwab) and made periodic contributions, which have now accumulated into a nice chunk of change. I also hold a joint tenancy "Schwab One" account with my father with basically nothing in it.

Fast-forward to the present, I have held good jobs with employer contributions to a 403(b) for more than a decade, so while I'm not wealthy, I'm doing okay with retirement savings. Meanwhile, my folks are now up in years and have had some medical expenses. They need the cash cushion more than I do (and it was their money anyway.)

Issues/Questions/Warnings:

* Income tax: My salary + amount of money in IRA = less than the next higher tax bracket. That's how the tax ramifications work, right?

* Penalty: Yes, it's 10%. I can live with that. But does it even apply, since this will go to my elderly parents? I am finding conflicting info regarding penalty exceptions.

* Selling Mutual Funds: Um. Apparently this is how I distribute the funds to myself. And...I'm out of my depth. Is this a particularly great or horrendous time? Does it matter? What do I need to know to do this, and how do I find it out (easy version, please.)

* Availability of funds: If I take the penalty and distribute the funds to myself now, then transfer them to the joint tenancy account, can my father simply withdraw the funds at his leisure?

Is there anything else you nice, friendly, totally-not-my-accountant people need to know to help me?

posted by desuetude to Work & Money (13 answers total)

You can take contributions out of a Roth IRA at any time with no penalties.
posted by infinitewindow at 9:42 PM on November 30, 2010 [2 favorites]

You have a Roth IRA! That means you can withdraw your contributions tax-free! Because you already paid income tax on that money. Start there and see how much that gets you. If the emergency goes on, you can consider dipping into your earnings (on which, yes, you will pay income tax and a penalty).

This is one reason I love the Roth.

Yes, you can just have the funds withdrawn into your Schwab One account and give your father access to them that way. You might consider a Schwab Investor Checking account for this, though; you'll earn a little interest and he can easily write checks (or use a debit card) to get to the money. The checking account is free.

When I withdrew funds from my Roth to buy a house, it took about two days. This was with Wells, not Schwab, but I can't imagine Schwab will be slower than Wells.
posted by kindall at 9:45 PM on November 30, 2010

Whose name is the IRA in? If it's in your name, I don't see a way around the penalty. If it's in his name, the penalty can be waived if the funds are used for medical expenses that exceed 7.5% of his adjusted gross income.
posted by kindall at 9:48 PM on November 30, 2010

Response by poster: The Roth IRA is in solely my name. Can I withdraw the contributions, even though I'm not the one who made them? (I never made any contributions to this account personally, all contributions were made by my father.)
posted by desuetude at 10:18 PM on November 30, 2010

I would check with an accountant, which I am not, but it should be the same as if your father gave you the money and you put it into the account. That is, it might be subject to gift tax. But probably not, because here is an annual exemption for gift tax which is higher than the contribution limits for the Roth IRA. In any case, the giver owes the gift tax, not the recipient, so if it was owed, your father would have paid it.
posted by kindall at 11:26 PM on November 30, 2010

It may be worth noting that when you give the money to your parents that it is taxable (I think--definitely not an expert). However, there is a gift exclusion for up to $13,000 per individual. So you can give your mom $13,000 and your dad $13,000, tax-free, each calendar year. Because it's December, you can give them a total of up to $52,000 tax-free in the next two months, but the clock is ticking.

Here's the IRS FAQ on gift taxes.

I could be wrong about all of this, please don't act on this without double-checking it, etc.
posted by kprincehouse at 12:02 AM on December 1, 2010

Best answer: >it should be the same as if your father gave you the money and you put it into the account

It is. That is the way it is treated. An account owner is the only person who can contribute.

And in addition to the $13,000 per year per person exemption, any gift that is made above those levels is subject to the lifetime $1 million exemption (current figure). Although a gift tax return has to be filed, no gift tax is payable until that level is reached.
posted by yclipse at 4:39 AM on December 1, 2010

Best answer: As others have stated, you can take out the money that was put in (contributions) tax free. It's only the earnings (dividends, increases in stock values, interest paid) that you have to pay a penalty on. As a bonus, if you replace the money you took out in a short time window (30 days?), it won't eat into your annual contribution cap.

There are scenarios where you can withdraw earnings penalty/tax free. Medical expenses are one, but I believe they're for your medical expenses, not your parent's.

As for whether it's a good time to sell: the market's been up like 40 percent in the past two years. Of course it's also still down from the 2008 peak, but I don't think you or I should expect that as the 'normal economy.' It's not a bad time to sell, I'd say. The mechanics of selling are simple: decide which funds to sell, put in an order with your broker, and at the end of the next trading day the mutual fund will calculate Net Asset Value (NAV) and convert your shares to money at based on NAV. Then you can withdraw money from the IRA.

Finally, make sure to ask your parents for permission to help them out like this. They gave you that money, and they may have other plans. For example, Medicaid or Medicare coverage might change once you drop below a specific level of liquid assets.
posted by pwnguin at 6:35 AM on December 1, 2010

Response by poster: Finally, make sure to ask your parents for permission to help them out like this. They gave you that money, and they may have other plans. For example, Medicaid or Medicare coverage might change once you drop below a specific level of liquid assets.

Yeah, wasn't actually planning on asking permission for my stubborn-ass parents. But I hadn't thought about Medicaid/Medicare ramifications. If I put funds in the joint tenancy account, will that money automatically count within my father's assets, or only if he withdraws cash?

(Not worried about gift tax issues, the total amount in the IRA is only about $17k.)
posted by desuetude at 6:59 AM on December 1, 2010

Also, whoever is holding your Roth -- Schwab or whoever -- can give you some advice on tax implications for withdrawing funds from your account. You don't need a financial adviser for that, just call them up and ask. Now, getting into the wider implications of how it might affect your own tax situation and your parents tax and benefits situation is more complicated and would probably require an accountant. Do your parents have a regular accountant who you could ask?
posted by amanda at 8:05 AM on December 1, 2010

Do you have any non-retirement savings? One thing to consider (to avoid penalties etc) would be to do sell funds from a non-retirement account, and gift that money to your parents instead.
posted by misterbrandt at 8:23 AM on December 1, 2010

Best answer: I put funds in the joint tenancy account, will that money automatically count within my father's assets, or only if he withdraws cash?

This might be different depending on how your state's laws work but in Minnesota, if you have a joint account, those assets are owned 100% by all account owners.

So, if both you and your dad on the account and you put $10,000 in it, all $10,000 gets included in his assets whether he takes money out or not.
posted by VTX at 11:00 AM on December 1, 2010

Response by poster: The Schwab people were nice, but didn't give me anything beyond the boilerplate warnings. And were audibly relieved at my "uhh, nevermind."

I'm reluctant to call the family accountant, as I don't want him to tip off my folks as to my inquiry. And if I do have to call him, I want to make sure that I'm already pretty much on top of what I need to know. Even if there are no negative implications for my parents' benefits/tax situation, it is a bit of a sticky emotional situation. (Ooof, aging parent/adult child relationships are not easy.)

Unfortunately, misterbrandt, while I'm doing pretty okay on retirement savings, I don't have much cash in any non-retirement savings accounts.

VTX, can you point me toward a source for the relevant laws regarding assets in PA and MD?
posted by desuetude at 11:36 AM on December 1, 2010