Structuring IRA Distributions To Avoid Penalties - Safe Harbor Planning: Several Useful Techniques

IRA distribution rules are a mine field. One incorrect move and you could find yourself faced with high taxes and penalties that may wipe out years of savings and investment. Complicating issues 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 1974, IRA policy have changed dramatically and legislation was enacted to severely punish those who do not follow the rules, to the letter of the law. IRAs come in lots of flavors but, for purposes of this article we will focus on the two major forms of IRAs: Traditional IRAs and Roth IRAs.

Techniques for Minimizing Penalties on Early Distributions

Generally, any distribution from an IRA before you reach age 59 1/2 is considered as an early distribution and is subject to a ten percent penalty on the taxable amount received in a distribution. There are specific IRA distribution rules that could be used to avoid the imposition of this early withdrawal penalty.

1. Using IRA Funds to Purchase or Construct Your First House - As much as $10,000 may be withdrawn from an IRA as an early distribution penalty-free, so long as the distribution is used to buy, construct or rebuild a first house for yourself, your partner,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 Funds for Medicinal Costs - Penalty-free early distributions could be made if the funds are used to pay unreimbursed medical costs which exceed 7.5 % of your adjusted total income. There is no obligation to itemize deductions to be eligible for this exception.

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

Roth IRA distribution rules

Roth IRAs have unique regulations 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 Contributions withdrawn aren't subject to the 10% penalty and there's no RMD with Roth IRAs.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 should have been opened for 5 years and the distributions must be made after reaching age 59 1/2. If you fullfil the 5-year rule but not the 59 1/2 year regulation, distributions in excess of your contributions will be taxable and subject to a ten percent 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, during the lifetime of the owner, allowing 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 are unaffected by future tax increases as your effective tax rate is always 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 delayed into 2011 and 2012. If you don't have sufficient money set aside to do a 100% conversion you can do partial conversions.

4. College Expenses - As Roth IRA contributions might be withdrawn, tax-free, penalty-free, at any time, this kind of contributions can be a tax-free future funding source for your child's school expenses.

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

• Roth IRA Withdrawal Rules
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