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Structuring IRA Distributions To Prevent Penalties - Safe Harbor Planning: Some Useful Techniques
IRA distribution rules are a mine field. One wrong move and you can discover yourself faced with high taxes and penalties that can wipe out years of savings and investment. Complicating matters is the Darwinian evolution of IRAs which have taken place since the pioneer IRA was launched in 1974 with the enactment of the Worker Retirement Income Security Act (ERISA ). Since 1974, IRA rules have altered dramatically and legislation was enacted to severely punish those who don't follow the regulations, to the letter of the regulation. IRAs come in a lot of flavors but, for reasons of this article we will focus on the two key types of IRAs: Traditional IRAs and Roth IRAs.

Techniques for Minimizing Penalties on Early Distributions

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

1. Using IRA Money to Purchase or Construct Your First House - Up to $10,000 might be withdrawn from an IRA as an early distribution penalty-free, as long as the distribution is used to buy, construct or rebuild a first home for yourself, your partner,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 Money for Medicinal Costs - Penalty-free early distributions can be made if the money are used to pay unreimbursed medical costs which exceed 7.5 % of your adjusted total earnings. There is no obligation to itemize deductions in order to qualify for this exception.

3. Using IRA Funds for College Costs - Conventional IRAs can be also tapped to aid fund college expenses; however, the taxable amount of the distributions from these IRAs will be subject to income tax in the year of the distribution.

Roth IRA distribution rules

Roth IRAs have unique regulations with respect to distributions. Contributions withdrawn are not subject to the 10% penalty and there's no RMD with Roth IRAs.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 must have been opened for 5 years and the distributions must be made after reaching age 59 1/2. If you meet the 5-year rule but not the 59 1/2 year rule, distributions in excess of your contributions will be taxable and matter of a 10% penalty.

1. No RMD - With Roth IRAs, there's no RMD at age 70 1/2. This means a Roth IRA owner is never needed to make a distribution out of their Roth IRA. As a result, Roth IRAs can grow, untaxed, during the lifetime of the owner, allowing a larger legacy for their beneficiaries.

2. Zero Percent Effective Tax Rate - Qualified distributions from Roth IRAs are not matter of income tax...ever. This means you're unaffected by future tax increases as your effective tax rate is constantly the same...zero.

3. Conversion Opportunities - Beginning after January 1, 2010 anybody, irrespective of their income level, may convert traditional IRAs into Roth IRAs. The tax on the taxable income for 2010 conversions can be delayed into 2011 and 2012. If you do not have enough money set aside to do a 100% conversion you can do partial conversions.

4. University Expenses - As Roth IRA contributions may 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.

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