Dear Readers —
The letter which follows is a compilation of inquiries from several individuals who find themselves facing the serious possibility of completely draining their IRAs due to the unforeseen and protracted downturn in the stock market. They did nothing illegal. They simply had unfortunate timing. Take heed.

Dear Gail,

I'm 56 years old. Two years ago I had to take early retirement in order to care for an aging parent suffering with Alzheimer's. The experience has been financially draining for a number of reasons.

First of all, my dad had no long-term care insurance to help cover the costs involved. Although we sold his home and moved him in with us, I still need help so I can get to the store and take care of the ordinary chores of life. That runs about $3,000/month, which we're paying for out of his rapidly-dwindling house proceeds. In addition, we've had to modify our home by installing a wheelchair ramp and a walk-in shower.

Before my dad became ill, I had a pretty good job making around $42,000/year with a 401(k). Now I'm working 24/7, but not earning a dime. And we've still got our mortgage to pay and one child about to start college in a couple of years.

When I retired, I rolled my 401(k) into an IRA. I hated to touch it, but frankly, we needed the money. My financial advisor told me about a way to access the money in your IRA without having to pay a penalty before age 59 ½.

In March 2000, I started taking monthly withdrawals of $2,500. Then the market started to drop like a rock. When I began the withdrawal program, my IRA was worth $293,000. Now it's around $165,000. At this rate, I'm going to exhaust it in about 7 years. This was supposed to be our "safety net" in retirement!

If I cut back on the nursing help a bit and shave some expenses elsewhere, I could reduce the amount I'm taking out, but my advisor says the IRS will penalize me if I do.

I can't believe the government would punish us for something like this. We'd be OK if the stock market hadn't collapsed. Who could have predicted that? It seems so unfair. I'd appreciate any advice you might have.


Dear Anne,

Most Americans are acutely aware of the 10% penalty imposed for withdrawing money from your IRA prior to age 59½. In IRS parlance this is called a "premature distribution." However, few people realize that Section 72-t of the tax code lists more than half a dozen exceptions which allow you to avoid this. (You will still owe ordinary income tax if your withdrawals are coming from a traditional IRA.)

Distributions that qualify are those paid:

— To a beneficiary if the IRA owner dies;

— To the IRA owner if he/she becomes disabled;

— For medical expenses that exceed 7.5% of your AGI;

— To pay health insurance premiums after you've been on unemployment for at least 12 weeks;

— For "qualified higher education expenses" — i.e. college costs for you, your spouse or a child;

— Toward the purchase of a "first-time" home (Warning! The max you can withdraw for this purpose is $10,000 from all your IRAs.);

— As part of a "series of substantially equal periodic payments" — Huh?!

You are thankfully not dead (!), disabled, paying college costs right now, or engaged in anything which would qualify for one of the first 6 exceptions listed above. You simply needed the money. That left the last exception as your only option. So your financial advisor correctly set up a series of monthly withdrawals using one of the IRS-approved methods of determining how much money you're allowed to take out.

Note that I said "allowed" to take out. You don't just get to pick an amount. There are IRS guidelines as to how much you can withdraw from your IRA based on your life expectancy. However, there is some flexibility, depending upon which of the three calculation methods you select.

The problem is, under two out of the three methods, once you come up with the withdrawal amount you cannot change it. Doesn't matter what the financial markets do. The regulations do not allow for adjustments once you begin. In the words of IRS spokesperson Don Roberts, "Everyone likes it when the market goes up. They don't like it when the market goes down." (For the record, if you had chosen the "life expectancy" method of calculating your withdrawals, the amount would change each year based on the value of your IRA. And given recent market activity, your withdrawals would be much smaller.)

The IRS's hands are tied: unless Congress amends the law, there is no flexibility. You're stuck.

Gary Charlebois, a financial planner with Pension Portfolios in La Verne, Calif., has been waging a campaign to change this. As he points out, these are exceptional times. "All the planning in the world would not foresee the current extended economic downturn combined with the terrorist attack." Together, they've dealt a one-two punch to the financial markets.

In light of this, Charlebois has been hounding politicians to cut us some slack on the regulations. However, while some folks in Washington have been understanding, there is nothing on the horizon that would change things. Despite the fact your account is down by about half, Anne, you are required to keep draining it to the tune of $2500 every month.

In fact, you cannot stop doing this for another 3 ½ years. Section 72-t spells out that once you begin a "series of substantially equal periodic payments," you must continue the withdrawals for at least 5 years or until you reach age 59 ½, whichever takes longer. Since you began the process at age 54, you must continue until you hit age 59 ½ in other words, for 51/2 years. If you had started at age 57, you couldn't stop until you were 62 years old.

What happens if you change the amount you're taking out? The IRS can look back to the very first IRA dollar withdrawn and retroactively assess the 10% penalty.

This may, in fact, be the less-than-ideal solution if you're really concerned about wiping out your retirement account. Bite the bullet. Pay the penalty. Stop or reduce the withdrawals. Have your financial advisor estimate what the penalty would be. Might not be as bad as you think and worth the peace of mind.

Roberts of the IRS is sympathetic, but points out, IRAs are supposed to be retirement assets, used later in life. That's why there's the 10% penalty: to discourage you from raiding your nest egg early. "You had a choice about two things: 1. whether to start IRA withdrawals in the first place; 2. which of the calculation methods to use."

It's unfortunate the markets have been in a protracted decline since the very month you began your withdrawals. Sorry to be the bearer of bad news,


P.S. There are important lessons here, folks:

Consider purchasing long-term care insurance once you reach your mid-fifties or later. Look for a policy which will cover the costs of receiving care in your home, not just in a nursing facility.

Think long and hard about tapping your IRA early. This isn't something to be undertaken lightly.

If you have a question for Gail Buckner and the Your $ Matters column, send them to moneymatters@foxnews.com  along with your name and phone number.

The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.