|
George Saenz
Bankrate.com
July 16, 2004
Dear Tax Talk,
I'm almost 56 and have about $300,000 in an individual retirement
account and about $170,000 in my company's 401(k). I'm considering
taking a one-year salary buyout offer from my current employer.
I plan to work at least part time at another, less-demanding, job.
However, I know I will need to supplement my income with withdrawals
from my IRA. Is this possible at my age without incurring high taxes?
If so, how do I go about it? Thanks.
-- Kim
Dear Kim,
It depends what you mean by high taxes. I assume you're asking if
there's a way to get around the 10-percent penalty on early withdrawals
from retirement accounts.
Generally, if you take a distribution from a retirement account
prior to reaching age 59½ there's a 10-percent penalty on
early withdrawals. However, there are exceptions to any general
rule.
The rules are slightly different for distributions from the 401(k)
and the IRA. Practically anyone at any age can begin withdrawing
from their 401(k) provided they no longer work at the company (referred
to as separation from service), and they can take withdrawals from
their IRA penalty-free if they do so at least annually and over
their estimated life expectancy, or over their life and the life
of their designated beneficiary (i.e., joint life expectancy). This
is referred to as substantially equal periodic payments.
Payments are substantially equal periodic payments if they are
made in accordance with one of the following methods.
- Required minimum distribution method. Under this method, the
resulting annual payment is redetermined each year.
- The fixed amortization method. The annual payment for each
year is determined by amortizing in level amounts the account
balance over a specified number of years determined using the
chosen life expectancy table and the chosen interest rate. Under
this method, the account balance, the number from the chosen life
expectancy table and the resulting annual payment are determined
once for the first distribution year and the annual payment is
the same amount in each succeeding year.
- The fixed annuitization method. The annual payment for each
year is determined by dividing the account balance by an annuity
factor that is the present value of an annuity of $1 per year
beginning at the taxpayer's age and continuing for the life of
the taxpayer (or the joint lives of the individual and beneficiary).
The annuity factor is derived using the mortality table in Appendix
B and using the chosen interest rate. Under this method, the account
balance, the annuity factor, the chosen interest rate and the
resulting annual payment are determined once for the first distribution
year and the annual payment is the same amount in each succeeding
year.
The latter two methods are more complex and even the IRS acknowledges
that taxpayers who choose them generally need professional assistance
to help them evaluate their individual circumstances.
Additionally, when you separate from service after age 55, you
can take larger or nonperiodic distributions from your 401(k) account.
That is, these 401(k) distributions do not have to be over life
expectancy in order to avoid the 10-percent penalty.
Mortgage
Rates News, Mortgage News, Financial News
|
