IRA Rules

Archive for March, 2009

Question: Hardship withdraw from 401k tax exemptions?

On 11/2010.  I withdrew 15,000.00 from my 401k to put down on a primary residence(first time homebuyer).  My understanding is that IRS has certain tax rule exemption on Hardship withdrawl up to 10,000.00.  Does anybody know the rule to the exemption early withdrawl from a 401k? if so, what is the IRS form that I need to fill out, what is the CA-FTB form that I need to Fill out? what I’m finding out that rule only applies to early withdraw from IRA accounts.

Answer: We had to take 2 hardship withdrawals this year for emergency home repairs.

We were allowed to not have taxes withheld from our disbursement check, and acknowledge they will be done at tax time 2012 for the 2011 filing year.

Ours were smaller, around $3500 each, and we were not informed of any tax exemption…only offered to elect to not have the taxes taken directly out of the disbursement at this time.

I hope any of that helps you, but I’m also answering so I can find this question again, so if someone has info for you about that, then it will help us out, too.

Good luck!

How to invest in Tax Liens with your IRA or 401K IRA Alternative

Question: Can I use an early Roth withdrawal to pay the taxes on the rollover from an IRA into that ROTH?

I will be 70 and a half in 2012, and I rolled over a portion of my IRA into a ROTH mid 2010 to benifit from the 2-year rule that allows me to report the rollover as income split between 2011 and 2011. Now I want to use any of my RMDs from my IRA to pay toward the resulting taxes. THEN, considering the early withdrawal penalty of 10% on the ROTH is less than the Taxes on an IRA, I plan to pay the remaining taxes with withdrawals from the ROTH. Then after 2012, I plan to continue a systematic IRA rollover to that ROTH that when combined with any IRA RMDs keeps my yearly taxable income below that $250,000 level, and paying the taxes this way. Eventually the 10% penalty goes away.

Answer: I really don’t get the aim of this exercise.

You said “considering the early withdrawal penalty of 10% on the ROTH is less than the taxes on an IRA”

But the money you put into the Roth this year is getting taxed in 2011 and 2012, and seeing how you aren’t looking at a long-term growth window (like a 22 year old right out of college) you lose the main benefit – long term tax free growth. On top of that, you pulled money out when you didn’t need to during a down market, meaning you won’t benefit as much from the hopeful rebound in the coming years.

Worse yet, you’ve now increased your taxable income over the next 2 years, which might put you in a higher tax bracket (unless you would be at the highest rate anyway, which would be even worse, because you accelerated income in a higher bracket when you could wait it out, take it as needed, and keep taxes low as possible).

I would probably go talk to some sort of financial adviser and get this whole thing sorted out. You still have time to have the Roth conversion reversed (“recharacterized”) so you won’t get dinged on taxes

Retirement Savings – What is a Roth IRA?

Due to simpler IRA rules, IRA participants can now use a uniform Life Expectancy table to determine their Required Minimum Distribution or RMD that will generally yield small distributions stretched over a greater number of years. 

The IRS requires that individuals must take minimum IRA distributions from their Traditional IRA account(s) in the year they become age 70½ and in subsequent years. This minimum distribution as specified under IRA distribution rules is called the Required Minimum Distribution or RMD. RMD applies to all: 

• Traditional IRA,
• Spousal IRA,
• SEP IRA,
• SAR-SEP IRA, and
• SIMPLE IRA accounts.

What are the Rmd Ira Rules?

Ira Rules concerning required minimum distribution or RMD are laid out below: 

IRA owners whose sole beneficiary is a spouse more than ten years younger may elect to use the regular Joint Life Expectancy Tables.

IRA owners can change beneficiaries after the Required Beginning Date (April 1st after the year in which the IRA owner attains age 70½) without increasing the RMD amount.

Beneficiaries whose life expectancies will be used to calculate post-death distributions do not have to be determined until September 30th of the year after the IRA owner’s death.

The IRA may be divided into a separate account for each beneficiary and each beneficiary may use his or her own Life Expectancy to calculate his or her RMD.

Beneficiaries have until December 31st of the year after the IRA owner’s death to decide how to take their distributions.

Mandatory lump sum IRA Distributions are eliminated.

• If the IRA owner dies before attaining age 70½, and there is no designated beneficiary, then the payout period will be a maximum of five years.
• If the IRA owner dies after attaining age 70 �, and there is no designated beneficiary, then the payout period will be the IRA owner’s remaining single Life Expectancy.

When must I take the Required Minimum Distribution (RMD)?

Under the Required Minimum Distribution Ira Rules, individuals must take a Required Minimum Distribution (RMD) for each year starting with the year in which the individual attains age 70 �. This is known as a Distribution Calendar Year. 

However, the first such RMD distribution for the first Distribution Calendar Year may be delayed until April 1st of the year following the year in which the individual attains age 70 �. (This date is referred to as the Required Beginning Date.) After the first Distribution Calendar Year, Required Minimum Distributions must be taken by December 31st of each year. 

Note: If an individual decides to delay his or her first Required Minimum Distribution until the Required Beginning Date (April 1st of the year after the first Distribution Calendar Year), then he or she will have two distributions in one tax year. 

Thereafter, for each Distribution Calendar Year in which the IRA owner is alive and has not exhausted his or her IRA account, he or she must take a Required Minimum Distribution by December 31st.