When Is It OK to Cash Out an IRA Early?

On this week's episode of Motley Fool Answers we talk about how to vet a charity before you give and discuss when it's not such a boneheaded move to raid your retirement funds prematurely. All this and more on this week's episode of Motley Fool Answers, which you can download for free on iTunes or Stitcher.

 

ALISON SOUTHWICK:

This is Motley Fool Answers. I'm Alison Southwick and I am joined, as always, by Robert Brokamp and Dayana Yochim, personal finance experts here at The Motley Fool. So here's a fun fact: An artist can steal your Instagram photos, blow them up really big, hang them on the wall of a gallery, call it art, and get really rich off of it.

ROBERT BROKAMP:

Wow!

DAYANA YOCHIM:

That's so flattering! Um, I mean, that's a crime. But, really -- this is good enough to sell?

ROBERT BROKAMP:

It's a flattering crime.

ALISON SOUTHWICK:

It is a flattering crime. It's what Richard Prince did. He's an artist and as part of the Frieze Art Fair in (where else?) New York City, he took a bunch of people's Instagram photos, blew them up really big, put them on the wall, and sold them all (except one, I think) for $90,000 each.

DAYANA YOCHIM:

Whoa!

ALISON SOUTHWICK:

He didn't ask these people's permission. Just took them. Put them on the wall.

ROBERT BROKAMP:

Wow, I thought that was supposed to be private. Are these people who had a public Instagram account?

ALISON SOUTHWICK:

So here's where it gets fun and legal. According to Instagram, your photos and videos are yours unless you choose to share them, in which case they are not yours anymore. So people can take it.

DAYANA YOCHIM:

Wow.

ALISON SOUTHWICK:

We don't know yet if this artist actually went through the legal way of doing this, but there is a legal way to do this where you can actually license the photos from Facebook (because Facebook owns Instagram). So, yeah. Instagram says they can sell your photos and grant permission on your behalf.

ROBERT BROKAMP:

Wow. That makes me concerned as a father with kids who use Instagram. But I have to admit looking at Flickr, I've seen some awesome picture. And it sort of crosses my mind not to sell it, but like man, I would love to put that on my wall.

ALISON SOUTHWICK:

Yeah. So when I first saw this, I was like, "Oh, that's kind of terrifying." But then I was like, "Wow. I wonder if I could sell people's Instagram pictures."

DAYANA YOCHIM:

[Laughs]

ROBERT BROKAMP:

[Laughs]

DAYANA YOCHIM:

Do you know what the pictures he sold were of?

ALISON SOUTHWICK:

Most of them were pictures of hot chicks.

ROBERT BROKAMP:

Oh, really? Selfies?

ALISON SOUTHWICK:

I don't know if they were necessarily selfies, but it was a lot of attractive women. I think the only one that didn't sell as part of the VIP event was a picture of two gentlemen.

ROBERT BROKAMP:

[Laughs]

ALISON SOUTHWICK:

Pretty women sell.

ROBERT BROKAMP:

I guess so. Yeah. So lesson here -- if you're going to post something on Instagram, just know that it's not yours anymore.

DAYANA YOCHIM:

And someone might make money off of it.

__________

How to check up on charities before giving

ALISON SOUTHWICK:

Natural disaster season is off to a really big start this year, considering what's going on in Oklahoma and Texas. It is so tragic and sad, and it's not going to end, because tornado season leads to hurricane season, leads to whatever special hell is in store for Southern California.

As sure as there are natural disasters, there are charities that spring up in varying degrees of awesomeness, so Dayana has some advice on the best places to vet charities before you give. This is particularly important, especially in light of the FTC just cracking down on four cancer charities that were blowing donors' money on extravagant things for the people who worked for the charity. It's awful what they're doing.

DAYANA YOCHIM:

Yeah, it is. And this is one of the more heinous crimes that's preying on people's emotions and altruism, so you really do have to protect yourself. I'll get into some of the websites you should go to, but a few red flags to be aware of.

Think twice before you're donating based on a phone call, especially if it's a cold call and you haven't heard of the organization. I know it feels rude to say no, but say, "You know what? This sounds interesting. I'm going to check it out on my own and see if I want to give."

Also be wary of individuals who are soliciting donations -- the "victims" posting on Facebook, Twitter, or any social media -- because it's a lot harder to check out if that kind of thing is legitimate. And another big one here (and this applies to one of the cancer charities in this recent case) is to watch out for similar sounding names.

ROBERT BROKAMP:

The Red Boss.

DAYANA YOCHIM:

[Laughs]

ROBERT BROKAMP:

The American Red Boss.

DAYANA YOCHIM:

Fight Cancerr (with two "Rs" at the end), or something like that. You want to make sure that the charity is legitimate and that you're not confusing it with another one.

There are a lot of places that you can go and find out the details about the legitimacy of these organizations and how they handle their funds. A few ratings sites to check are Give.org, which is part of the Better Business Bureau's Wise Giving Alliance. This is especially helpful if you want to look into a local charity. CharityNavigator.org is another one that a lot of people have probably heard of. And they get a lot of the information from Form 990. This IRS Form 990 is quite important because nonprofits with $200,000 or more in annual revenue have to file this, and it's got a lot of the good details in there.

ALISON SOUTHWICK:

I believe people in the business call it "The 990."

DAYANA YOCHIM:

"The 990?" I'm sorry. I'm being formal. "Form 990." So it's got details of revenue, program costs, assets, expenses, if the group lobbies, if it makes political contributions. And you can also see the names and compensation of the highest paid people in that organization.

ROBERT BROKAMP:

Speaking of the IRS, they actually have a tool on the IRS website that you can enter the charity and it gives you the tax-deductible status of any contribution, so that's very helpful. And remember that you have to itemize to actually get the tax break. Keep good records and all that fun stuff.

DAYANA YOCHIM:

Another one is CharityWatch.org. It digs deep into accountability. It's got a lot of free information about shenanigans they've dug up in the finances -- how charities manage their funds. Two more: GiveWell.org focuses on international charities working on health, nutrition, and poverty alleviation. And MyPhilanthropedia.org (which gets my award for the best name) has thousands of experts that evaluate charities that are in their own specialty.

These are some of the sites that you can go to, to check up on a charity before you donate your dollars.

ALISON SOUTHWICK:

Yeah. Don't be a lazy giver. Do your due diligence.

__________

Cashing in an IRA early

ALISON SOUTHWICK:

Well, Marco Rubio came under fire this week for admitting that he cashed out a retirement account worth nearly $70,000 to cover buying a new fridge, a new air conditioner, and tuition for his kids. He also said he needed some cash to see him through the 2016 election.

My initial reaction, like most reporters, was, "What an idiot! That money is sacred! What are you doing?" Right?

DAYANA YOCHIM:

That was also my initial reaction, because when you raid your retirement account before it's time -- before you're allowed to -- it's generally not a good idea. You're going to pay early withdrawal penalties, usually 10%. You're also going to pay income taxes on that money. So blam, blam. You just gave up a good chunk of that money that you've been saving so hard and that should stay in the market and compound over time.

ALISON SOUTHWICK:

Right. CNN did a little back-of-the-envelope math, and, assuming he's in like a 33% tax bracket and assuming a bunch of stuff and penalties and cashing out stuff, they said that he would only have netted about $38,000 from the original $68,000. That's CNN's back-of-the-envelope math.

So yes, it always seems like a bad idea to raid your retirement. So of course Robert Brokamp's response was, "Well, I don't know. If I thought about it a little bit more ... I could see some reasons why it might not be such a bad idea." So... why is it maybe not? Why and when is it maybe OK to cash out some of your retirement?

DAYANA YOCHIM:

Just a reminder, we're talking about cashing out here, not borrowing from your 401(k) or IRA.

ALISON SOUTHWICK:

Exactly.

ROBERT BROKAMP:

We're going to talk only about IRAs, because the rules are different for 401(k)s and 403(b)s here. I'm not going to pass judgment on Marco Rubio.

DAYANA YOCHIM:

Why not? We just did.

ROBERT BROKAMP:

I don't know his situation, other than saying as someone who grew up in Florida, if you need an air conditioner, you need an air conditioner.

DAYANA YOCHIM:

I watched Bloodline on Netflix and that show, if nothing else, proved the need for a working air conditioner at all times.

ROBERT BROKAMP:

Right.

DAYANA YOCHIM:

Continue.

ROBERT BROKAMP:

So one of my financial planning principles is that whenever you make a decision, you have to look at the whole situation. We don't know his situation, but we do know that he's going to receive a pension. So my main point here is you have to look at everything. There are some people who actually have saved too much for retirement and getting money out of their IRA may not be such a bad idea.

DAYANA YOCHIM:

Oh, to be one of those people.

ALISON SOUTHWICK:

Right?

ROBERT BROKAMP:

Right, right. Well, there are other pensions. Only 10% of the private workforce get it. But federal employees, military retirees, 75% of state and local employees all get a pension, and often it covers everything they need. So if they've been saving for retirement, they might have a reason to take that out early.

There are actually some exceptions to the 10% penalty. If you're using it for qualified higher education expenses -- even for your own expenses or your kids' expenses or spouse's expenses. If it's a first-time home purchase, then $10,000 for you and $10,000 for your spouse can come out penalty free. And first time means if you haven't owned a home in the previous two years. That's one way to bypass that if you really need that down payment. There are all kinds of exceptions -- medical exceptions, military reserve exceptions. So it may not be as bad as CNN estimated.

Another reason is we don't know if that was a traditional IRA or a Roth. With a Roth IRA, you can take out the contributions any time, tax and penalty free, even if you're younger than 59-1/2. Many people, including myself, have written articles about the Roth IRA actually not being a bad idea for an emergency fund because you talk about that advice of building up three to six months of expenses and putting it in cash. Most people end up not needing it. So if you put it in a Roth IRA, it grows. If you need those contributions (not the growth) take them out. You still get to keep that growth and if you never have an emergency, you save that money.

Finally, in terms of the household finances, you might have your money tied up in other things. Something like real estate is not easy to sell. It's got high transaction costs. You could take out a loan, but sometimes that takes a long time, too. So if you need the money real quick ...

ALISON SOUTHWICK:

... because you're going to be running for president ...

ROBERT BROKAMP:

... you can get it out of your IRA.

And a final little rule: If you take out money from your IRA and put it back in within 60 days, you don't pay the taxes or the penalty. It's sort of like taking out a short-term loan from yourself.

DAYANA YOCHIM:

OK. Those were all really good reasons.

ROBERT BROKAMP:

My bottom line is that for most people, no, you shouldn't be tapping your retirement account...

ALISON SOUTHWICK:

Right, so Dayana and I were right.

ROBERT BROKAMP:

But, I am not going to judge anybody without knowing their entire situation, and there are times when it makes sense.

ALISON SOUTHWICK:

So there you have it. Robert Brokamp is giving you permission to raid your retirement assuming you can bypass the penalty. It's in a Roth. Your retirement stash is huge. And he'll even give you a dispensation if you can't access cash through other assets. Is that fair?

ROBERT BROKAMP:

Very fair.

ALISON SOUTHWICK:

All right. So if this all goes south, you can blame Robert. And Dayana and I told you so.

♫Yeah too overworked, too young to retire♫

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A Foolish version of the Scripps National Spelling Bee

ALISON SOUTHWICK:

The Scripp[s] Spelling Bee was last week, so I thought we could have some fun seeing what good spellers Robert and Dayana are. Isn't this fun?

Considering you are both editors, and have a pretty strong background in English, this will be particularly humiliating if you get them wrong.

DAYANA YOCHIM:

I just love these games you come up with, Alison.

ALISON SOUTHWICK:

I know. It's the only time I get to feel smart, because I have the answers. OK. Who wants to go first?

ROBERT BROKAMP:

Ladies first.

ALISON SOUTHWICK:

All right, Dayana. The word is fiduciary.

DAYANA YOCHIM:

Ok! f-i-d... doo... d-u... F-i-d-u-c-i-a-r-y.

Gong!

ALISON SOUTHWICK:

That's correct. Of course a fiduciary, in the way that we care about it the most, is a financial advisor who is required to put a client's needs before his or her own. It's very important.

ROBERT BROKAMP:

Legally required. And you'd be surprised that many brokers (the folks like the Merrill Lynches and Morgan Stanleys) actually are not legally required to put your interests first).

DAYANA YOCHIM:

Mm-hmm.

ROBERT BROKAMP:

It's kind of crazy.

ALISON SOUTHWICK:

The next word. Robert Brokamp, are you ready? Amortization.

DAYANA YOCHIM:

Ugh!

ROBERT BROKAMP:

A-m-o-r-t-i-z-a-t-i-o-n.

Gong!

DAYANA YOCHIM:

I always want to put two "m's" on that.

ALISON SOUTHWICK:

Of course, basically amortization is paying off a debt with a fixed repayment schedule such as a mortgage or a car.

ROBERT BROKAMP:

Right. Latin route of mort, as in to kill your debt.

ALISON SOUTHWICK:

Nice! Very nice. Extra credit to Robert Brokamp.

ROBERT BROKAMP:

Thank you so much.

ALISON SOUTHWICK:

Okay. Ready? Next word. Laissez-faire.

ROBERT BROKAMP:

Oh, my gosh.

DAYANA YOCHIM:

Oh, no. Okay. L-a-i-s-s-e-z-f-a-i-r-e?

Gong!

ALISON SOUTHWICK:

Yeah!

ROBERT BROKAMP:

Really? I would have totally blown that.

ALISON SOUTHWICK:

Of course laissez-faire is used to describe an attitude or a policy of keeping the government out of your business, particularly the markets. Laissez-faire. Hands off!

ROBERT BROKAMP:

The root being you're too lazy to care. Just kidding. I made that up.

ALISON SOUTHWICK:

Doesn't it just mean like hands off or something?

ROBERT BROKAMP:

Yeah. Something like that.

DAYANA YOCHIM:

Which is why you get the point taken away.

ALISON SOUTHWICK:

There we go. And we're off to the races. I don't make the rules, Robert.

ROBERT BROKAMP:

Dayana does. Obviously!

ALISON SOUTHWICK:

All right. The final word is -- it's two words but you can spell the first one -- promissory note.

ROBERT BROKAMP:

Okay. So it's p-r-o-m-i-s-s-a-r-y? N-o-t-e?

Bzzz!

DAYANA YOCHIM:

O! O! O-r-y!

ROBERT BROKAMP:

It is o-r-y?

ALISON SOUTHWICK:

It's o-r-y.

ROBERT BROKAMP:

Oh, man!

ALISON SOUTHWICK:

You got burnt.

DAYANA YOCHIM:

I'm so sorry, Robert.

DAYANA YOCHIM:

Can you spell note?

ROBERT BROKAMP:

N-o-t-e. K-n-o-n? Something like that.

ALISON SOUTHWICK:

Too bad, Robert. If only Dayana hadn't taken your extra credit points away, this would have been a tie!

ROBERT BROKAMP:

[Laughs]

DAYANA YOCHIM:

I'm a vicious competitor.

ALISON SOUTHWICK:

But the win goes to Dayana this time. Of course, a promissory note is a written promise by one party to another to pay a sum of money back either on demand or at a specific time. Promissory note.

ROBERT BROKAMP:

I thought it was a trick one. Anyways. Oh, well.

ALISON SOUTHWICK:

Good job, you guys. Good job.

____________

ALISON SOUTHWICK:

That does it for this week. The show is edited tenderly by Rick Engdahl. Theme music is composed and performed by Dayana Yochim. You can reach us at [email protected]. Also if you have time, please leave us a review and a rating on iTunes or Stitcher. We love your feedback. For Robert Brokamp and Dayana Yochim, I'm Alison Southwick. Fool on!

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