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Structuring IRA Distributions To Prevent Penalties - Safe Harbor Planning: Several Useful Ways

IRA distribution rules are a mine field. One incorrect move and you could find yourself faced with high taxes and penalties which could wipe out years of savings and investment. Complicating matters is the Darwinian evolution of IRAs which have taken place since the pioneer IRA was launched in 1974 with the enactment of the Employee Retirement Income Security Act (ERISA ). Since '74, IRA regulations have changed dramatically and laws was enacted to severely punish those who don't follow the regulations, to the letter of the regulation. IRAs come in many flavors but, for purposes of this article we'll focus on the 2 major kinds of IRAs: Traditional IRAs and Roth IRAs.

Techniques for Minimizing Penalties on Early Distributions

Normally, any distribution from an IRA before you reach age 59 1/2 is considered as an early distribution and is matter of a ten percent penalty on the taxable amount received in a distribution. There're certain IRA distribution rules that could be used to avoid the burden of this early withdrawal penalty.

1. Using IRA Money to Purchase or Construct Your First House - Up to $10,000 may be withdrawn from an IRA as an early distribution penalty-free, so long as the distribution is used to purchase, build or repair a first home for yourself, your partner, you or your spouse's kid, you or your spouse's grandchild or you or your wife's parent or ancestor.

2. Using IRA Money for Medical Bills - Penalty-free early distributions could be made if the funds are used to pay unreimbursed medicinal costs which exceed 7.5 % of your adjusted total earnings. There is no obligation to itemize deductions to be eligible for this exception.

3. Using IRA Money for University Costs - Conventional IRAs can be also tapped to aid fund college costs; however, the taxable amount of the distributions from these IRAs shall be matter of income tax in the year of the distribution.

Roth IRA distribution rules

Roth IRAs have unique policy with respect to distributions. Contributions withdrawn aren't subject to the 10% penalty and there's no RMD with Roth IRAs. So as for Roth IRA earnings distributions to be tax-free, the account must have been opened for five years and the distributions should be made after reaching age 59 1/2. If you fullfil the five-year rule but not the 59 1/2 year regulation, distributions in excess of your contributions will be taxable and matter of a 10% penalty.

1. No RMD - With Roth IRAs, there's no RMD at age 70 1/2. This means a Roth IRA owner is never required to make a distribution out of their Roth IRA. Because of this, Roth IRAs can grow, untaxed, throughout the lifetime of the owner, permitting a larger legacy for their beneficiaries.

2. 0% Effective Tax Rate - Qualified distributions from Roth IRAs are not matter of income tax...ever. This means you're unaffected by future tax increases as your effective tax rate is constantly the same...zero.

3. Conversion Opportunities - Beginning after January 1, 2010 anyone, irrespective of their earnings level, may convert conventional IRAs into Roth IRAs. The tax on the taxable income for 2010 conversions can be deferred into 2011 and 2012. If you don't have enough money set aside to do a 100% conversion you can do partial conversions.

4. University Expenses - As Roth IRA contributions may be withdrawn, tax-free, penalty-free, at any time, such contributions can be a tax-free future funding source for your child's university expenses.

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Associated Articles

• Structuring IRA Distributions To Prevent Penalties - Protected Harbor Planning: Some Useful Techniques
• Structuring IRA Distributions To Prevent Penalties - Safe Harbor Planning: Several Useful Techniques
• Structuring IRA Distributions To Prevent Penalties - Safe Harbor Planning: Some Useful Ways
• Structuring IRA Distributions To Prevent Penalties - Secure Harbor Planning: Some Effective Ways

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