Avoid the Minimum Required Distribution Penalties

Avoid the Minimum Required Distribution Penalties

by | Jan 3, 2019 | Taxtips

Avoid the Minimum Required Distribution Penalties: Once taxpayers reach the age of 70.5, they are required to take what is known as a “required minimum distribution” from their qualified retirement plan or IRA every year. If this is the first year that this rule applies to you and you haven’t taken your money out yet, there’s no need to panic – you don’t have to do so until some time during the first quarter of next year. Penalties Of course, if you wait until 2019 to take your 2018 distribution, you’re going to end up having to take two distributions in one year: one for 2018 and one for 2019. As we all (hopefully) know, there are some basic steps investors can take to withdraw funds from a traditional IRA without incurring a 10% penalty. Let’s start with the obvious, like waiting until after 59 ½ years old to withdraw funds. Withdrawing annual allowed contributions before your taxes are due will also avoid the penalty, and the same goes for withdrawing excess contributions. If you discover that you’ve contributed more than allowed (due to income limits or error) you are free to remove the excess and any associated growth before the tax return is due for the year. Additionally, taking your required minimum distributions will keep the 10% penalty at bay. Technically this is covered by waiting to withdraw after age 59 ½ but sometimes required minimum distribution is required of a person who has inherited an IRA, regardless of age.
 But beyond those well-known methods, there are more obscure ways to withdraw from your traditional IRA without getting knocked down by that painful penalty.
Take, for example, the so-called Series Of Substantially Equal Periodic Payments, better known as SOSEPP. This is the classic Section 72(t) method for withdrawing funds without penalty; essentially you agree to continue taking the same amount from your IRA for five years or until you reach age 59½, whichever is greater.
Early Withdrawal Penalties

Early Withdrawal Penalties

by | Dec 1, 2017 | Deduction & Credits, Tax Planning

Early Withdrawal Penalties

Withdrawal Penalties.The whole idea of retirement planning is to ensure that you have enough money at your disposal during the non-working phase of your life. This is one of the primary reasons there are penalties if you go for early withdrawal in such schemes. The government provides several tax breaks for retirement plans and also penalties if you wish to withdraw from those earlier than anticipated. These penalties are in place to discourage you from using these funds for anything else apart from retirement. Essentially, if you withdraw any amount from your retirement fund accounts before the age of 59 and half years, you pay a penalty of 10%. This is on the top of the income tax that you must pay on the amount you just withdrew. Thus, you need to access the situation very carefully before going ahead with the decision to disturb your retirement funds.

Can you avoid the penalty?

The following are some of the most common methods that you can follow to skip the penalty.

  • Maturity age

All the retirement funds have a maturity age of 59 ½ years. If you withdraw any money from your funds post this age, the 10% penalty does not apply to you. However, you will still have to pay income tax on each withdrawal.

  • Medical Expenditure

If you have undergone any medical procedures or treatment and the amount exceeds 10% of your annual income, you can use your IRA contributions to pay for the same. The only two check points being, the medical expenses should be in the same year and you should not already have reimbursed it.

  • Purchase of Home

You can use up to $10000 (or $20000 valid only for couples) from your IRA contribution to pay for your first home without inviting any sort of penalty. IRA will pursue a background check to ensure neither you nor your spouse owns a home within the two-year period which leads to the sale of a house. If due to some reason the plan falls apart, you must deposit the amount back in 120 days to avoid penalty.

  • Disability

In the unfortunate event of you becoming disabled before the maturity age for retirement funds and cannot take part in any activity which will act as source of income, you can opt for a penalty free withdrawal from your retirement fund. The IRA entertains only genuine cases, as it sends in a physician to confirm the same.

  • College Expenses

There is yet another way in which you can skip the penalty of withdrawing the fund prior to the prescribed age. If you, your spouse, children or grandchildren want to pursue higher education, and you decide to pay the same from your IRA contributions, it will not fetch any penalties. IRA considers usual expenditure such as tuition fees, supplies, books etc.

  • Health Insurance

In the unfortunate event of you being unemployed for a certain duration of time, you can use your IRA contributions to pay for medical insurance to avoid them from getting lapsed. You can pay for the medical insurance for yourself, your spouse and any dependents. In order to qualify for the same, you should have received compensation for unemployment for a period of 12 weeks consecutively.

  • Passing it on

You can pass on the retirement funds to an heir if you lose your life before the age of 59 ½ years. This will not attract any penalty unless the heir is your spouse. In that case, they are again subject to the 10% early withdrawal penalty.

There are sure some ways of getting around the 10% penalty. But that should be your last resort and not the first line of defense. You should only consider IRA or any retirement fund for that matter in situations where there are no other ways out.