Early Withdrawal

Archive for July, 2008

Question: Question about government benefit?

One of my friend has low income from her regular job salary, but she still tried to put away some money on her roth IRA account. As you know, the earning in roth IRA is tax free. But over the years, the penny stock she bought has grown a lot, and she sold it recently, and make a lot of capital gain. Now she is not poor, since she has some asset(cash) in her roth IRA account, but at the meanwhile she is still poor since she can not take the capital gain out of her IRA account till she turns to 59 1/2 years old, otherwise, she need to pay penalty for Early Withdrawal.

Answer: let’s be sure we are talking apples and apples, not apples and oranges
a Roth IRA has no tax advantage at the start or end, you do have to keep it at least 5 yrs
now a regular IRA has a tax advantage when contributed, and is penalized if one withdraws prior to 59 1/2,
after that, the distribution is issued and a 1099 which will show how much is taxable at that time
did she report her IRA before or is she now being asked to report it? she always had an asset in her IRA account regardless of the amount

Tax Deduction Tips : IRA Tax Penalties

What account balance should be used for the 72t distribution computation?

Revenue Ruling 2002-62 states that the account balance that is used in a 72t distribution computation must be determined in a “reasonable” manner based on the facts and circumstances.

The example given is for an IRA with daily valuations that made its first 72t distribution on July 15, 2003. The IRS said that it would be reasonable for the first distribution to determine the yearly account balance using the RMD method based on the value of the IRA from December 31 to July 15.

For subsequent years, under the RMD method it would be reasonable to use the value of the IRA either on December 31 of the prior year or on a date within a reasonable period before that year’s distribution.

72t distribution Example 1:

An individual has been given his early package for retirement, and using the RMD method, wants to begin 72t Distributions on July 15. According to Revenue Ruling 2002-62, it would be reasonable to determine the account balance using the RMD method based on the value of the IRA on any day from December 31 of the prior year to July 15.

For distributions in subsequent years using the RMD method, the ruling states it would be reasonable to use the value either on December 31 of the prior year or on a date “within a reasonable period before that year’s distribution”.

72t distribution Example 2:

The individual in Example 1 is taking the second distribution on July 15 of the next year using the RMD method. Use of the account balance on December 31 of the prior year is reasonable. Use of the June 30 value is probably reasonable. Use of the March 30 value is probably not reasonable.

People choosing to use an account balance other than December 31 of the prior year or the previous month end account balance should consult their tax advisor to determine if use of such account balance is reasonable, considering their early package for retirement.

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