Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, July 24, 1995 TAG: 9507240129
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
Withdraw too soon or too late - or too much or too little - and you will be subject to tax penalties. The Virginia Society of Certified Public Accountants said there are three basic rules governing IRA withdrawals, each of them tied to the age of the owner.
The first rule is that you will face a 10 percent penalty on premature distribution if you withdraw funds from your IRA before you reach age 591/2. The society said this rule is intended to discourage taxpayers from using IRAs as short-term tax shelters.
Exceptions apply, however, for distributions that are made upon your death, because of your disability or as part of a series of substantially equal (annuity-type) payments over your lifetime.
Rule No. 2 states that, in general, you may withdraw your IRA dollars at any time without IRS penalty after you reach the age of 591/2.
If you made tax-deductible contributions to your IRA, your withdrawals are taxed as ordinary income. If you made nondeductible deposits to your IRA because your income exceeded the deductible limits - and you had a pension plan at work - a portion of your withdrawal is tax-free. The CPA society reminds that you will need to file Form 8606 with your tax return if you withdraw nondeductible contributions.
The third rule is that you must begin to withdraw money from your IRA by April 1 of the year following the year in which you reach the age of 701/2, and by each Dec. 31 after that. The minimum-withdrawal schedule is designed to force you to begin pulling money out - and paying taxes on it - before you die.
Waiting too long to begin the payout process carries stiffer penalties than withdrawing too soon, the CPAs said. If you don't take out the minimum sum required each year, the IRS will take 50 percent of the amount you fail to withdraw.
Minimum withdrawals are based on your life expectancy or on the joint life expectancy of you and your designated beneficiary. To estimate your withdrawals, the CPAs said, you must use life expectancy tables that appear in IRS Publication 590, ``Individual Retirement Arrangements.''
Once you have chosen to use the single or joint life expectancy method, you cannot switch from one method to the other.
To determine how much you must withdraw, add up the balances in all your IRAs as of the end of the calendar year, then divide that total by the number of years you are expected to live. A 70-year-old, for example, has a single life expectancy of 16 years, according to the IRS tables. So if you are 70 and have $100,000 in your IRA, the first required withdrawal would be 1/16th of that amount, or $6,250.
Should you decide to calculate your minimum required distribution based on the joint life expectancy of you and your designated beneficiary, your minimum withdrawal would be based on a longer life expectancy, the society said.
In effect, using joint life expectancy reduces your required minimum annual distribution and extends the payout period. To be certain you don't underestimate your minimum withdrawal - and risk facing costly penalties - you may want to consult a certified public accountant or other tax adviser.
If you have several IRAs, the government requires that you compute the minimum distribution for each separate account. This can be complicated, particularly if the beneficiaries of your different accounts are not the same age.
Once you determine the minimum withdrawal required for each account, add these amounts to get the total required withdrawal for the year, the society said. However, you can withdraw the total amount from one account or from any combination of them.
To estimate minimum withdrawals for subsequent years, you simply reduce your original life expectancy number by one year. Thus, in the above example, you can take 1/15th the second year, 1/14th the third year and so on.
In the alternative, you can recompute your life expectancy each year. Annual recalculation allows you to stretch out your IRA distributions over a longer period of time because, based on IRS tables, for each year you live, the longer you are expected to live.
Finally, the CPAs pointed out that you can choose to withdraw all your IRA funds at once. However, this may subject you to a large tax bill and possible penalties. What's more, you'll need to manage those funds carefully to ensure you don't deplete them too quickly.
by CNB