MUSCLE


 

From time to time we get questions about the tax implications of taking funds from the different types of IRAs.  Regular IRAs and Roth IRAs have differing distribution rules.  Following is a short summary. 

 

For Roth IRAs, contributions can be withdrawn at any time, tax and penalty free. However, a different standard applies to investment earnings.  For earnings in a Roth IRA, there is a five-year rule, which states you must hold the account for five years before a withdrawal of your investment earnings is considered qualified.  Otherwise, you will pay taxes plus a 10% penalty on the earnings portion of the distribution.  In addition to the five-year rule, to be considered qualified, a withdrawal that includes earnings must meet one of the following conditions: 

 

·       Use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.

 

·       Use the withdrawal to pay for qualified education expenses.

 

·       Be at least age 59 ½.

 

·       Become disabled or pass away.

 

·       Use the withdrawal to pay unreimbursed medical expenses or health insurance if you’re unemployed (additional rules apply).

 

·       The distribution is made in a series of substantially equal periodic payments (‘SSEPP’), which locks you into taking at least one distribution per year for at least five years or until you turn 59 1/2, whichever comes last. 

 

For IRAs that fall under traditional IRA rules, withdrawals taken before age 59 ½ will be taxed and penalized 10%.  While you can’t avoid taxes on the traditional deductible IRA distribution, there are exceptions that would waive the early withdrawal penalty.  The list of exceptions are as follows: 

 

·       Use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.

 

·       Use the withdrawal to pay for qualified education expenses.

 

·       Be at least age 59 ½.

 

·       Become disabled or pass away.

 

·       Use the withdrawal to pay unreimbursed medical expenses or health insurance if you’re unemployed (additional rules apply).

 

·       The distribution is made in a series of substantially equal periodic payments (‘SSEPP’), which locks you into taking at least one distribution per year for at least five years or until you turn 59 1/2, whichever comes last.  

 

For SSEPP distributions which deviate from the distribution schedule before the appropriate amount of time has passed, the tax penalty can be imposed on all amounts withdrawn up to that point. The amount of the distributions must be based on an IRS approved calculation that involves your life expectancy, your account balance, and interest rates.  There are three options to calculate your specified withdrawal schedule, and they are required minimum distributions, amortization, or annuitization.   

 

You can take the substantially equal payments on a monthly basis.  The monthly payment under the RMD method would be the annual calculated amount divided by 12.  Under the amortization and annuity methods, the choice of having the payment made monthly should be part of the original calculation. 

 

Now, to a lighter subject.  The 2018 Dodge Challenger SRT Demon may be one of the most well-muscled muscle cars to ever come out of Detroit.  It made its debut at the New York Auto Show recently, to a rousing reception.  The car features 840 horses, the ability to lift its front wheels off the ground, and just one seat – for the driver.  The waiting list for one already exceeds the 3000 cars Dodge plans to build.  You can read more at http://www.pressreader.com/usa/usa-today-us-edition/20170412/281741269284235. 

 

Dodge, unlike competitors who have focused on fuel efficient alternative or hybrid vehicles, has built a stable of top drawer muscle machines, including the Challenger, Charger, and Viper.  Say what you will about the state of the American auto industry, but they rule both the muscle car category and the land yacht category, both, to my mind, uniquely American. 

 

Quote of the week: 

 

“The hardest thing in the world to understand is the income tax.”

 

                                                                        Albert Einstein

 

 

 

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