If IRA Assets Must Be Taken Early, Avoid A Penalty, Says David M. Spitzberg, CPA.Business Editors JENKINTOWN, Pa.--(BUSINESS WIRE)--Oct. 28, 2002 Minimum required distribution rules and strategies have been recently revised. Topics of discussion include when IRA Ira, in the Bible Ira (ī`rə), in the Bible. 1 Chief officer of David. 2, 3 Two of David's guard. IRA, abbreviation IRA. money must be taken, how to minimize payments and wealth creation for current and future generations. But what happens if an IRA owner needs to take money earlier than required? There could be a tax disaster. A premature distribution Premature distribution A distribution from an IRA before the owner reaches age 59-1/2. Generally, a 10% penalty tax is owed on such a distribution. Also known as an early distribution or an early withdrawal. could be subject to a 10% or even 25% excise tax Excise Tax 1. An indirect tax charged on the sale of a particular good. 2. A penalty tax applied to ineligible transactions in retirement accounts. This penalty is assessed by and paid to the IRS. Notes: 1. , also referred to as a penalty. That's in addition to income tax at ordinary rates that could be owed. Given a $50,000.00 early distribution that is fully subject to income tax, an IRA owner could be faced with a $5,000.00 or $12,500.00 penalty. If that same taxpayer is in the 27% federal tax bracket Tax Bracket The rate at which an individual is taxed due to a particular income level. Notes: Each income class is taxed at a different level. Generally, the more you make the more you are taxed. , an additional $13,500.00 would be owed. The total tax bill for the $50,000.00 could be either $18,500.00 or $26,000.00. Either 37% or 52% of the premature distribution could be lost. Penalties won't apply to payments that are: a. Made on or after the owner reaches age 591/2, b. Attributable to the owner becoming disabled, c. Part of a series of substantially equal periodic payments Substantially equal periodic payments (SEPP) A method of distribution from IRA account assets that under certain conditions is not subject to the IRS's 10% premature withdrawal penalty for those under age 59-1/2. (IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. Revenue Ruling 2002-62 recently revised the rules starting in January 2003. Use this year is optional.), d. Used to pay medical expenses within certain limits, e. Used to pay deductible medical insurance within a defined period, f. Used for first time homebuyer costs (These costs qualify even if not for the individual's first home.), g. Used to pay for qualified higher education expenses, h. Used because of an IRS levy on an IRA, i. Attributable to Roth IRA Roth IRA An individual retirement plan that bears many similarities to the Traditional IRA. Contributions are never deductible, and qualified distributions are tax-free. A qualified distribution is one that is taken at least five years after the taxpayer established his/her first contributions, j. Attributable to taxable conversions from a traditional to a Roth IRA and paid after a five-tax-year period, k. Attributable to nondeductible traditional IRA Traditional IRA An IRA that is not a Roth IRA or a SIMPLE IRA. Individual taxpayers are allowed to contribute 100% of compensation (Self-employment income for Sole proprietors and partners) up to a specified maximum dollar amount to their Traditional IRA. contributions or l. Specifically required by a decree of divorce or separate maintenance or a written instrument incident to such a decree. A trustee-to-trustee transfer is suggested. Avoid placing the funds in the direct possession of either spouse. A penalty will not be owed if a distribution is made on or after the owner's death. Also, if the rules are followed for rollovers and direct transfers, an excise tax can be avoided. To stay up to date with current developments, log onto: www.CPAforIRA.com or www.CPAforBusiness.com. |
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