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This article may be used for basic information and educational purposes. This is not intended to apply to specific circumstances and is for "general knowledge only". Reading of this article is subject to the blanket and general disclaimers attached hereto -

Disclaimer for all except securities related articles

Regarding Distributions From Employer Pension Plans

IRA Distribution Strategies

Tapping Your IRA Penalty-Free

Annuitize Your IRA

Withdraw Roth Contributions

Take a 60-Day Loan

Special Situations

If you Have Self-employment Income

Technical Analysis and Citations (“Bean Counter” Stuff)

Are Rollovers Permissable?

What Plan is Eligible to Receive a Rollover?

Are There Exceptions to the 10% Penalty for Withdrawal Prior to Age 59 ½

End Notes

IRA Distribution Strategies

Tapping Your IRA Penalty-Free

ALTHOUGH 59 1/2 is the magic number for starting to receive IRA distributions without penalty (whether you continue to work or not), there are some circumstances under which you can get at your IRA funds even earlier. Here's a rundown:

Annuitize Your IRA

One way to take money from your traditional IRA without incurring the 10% penalty is to "annuitize" your account. The way this works is that for five years, or until you turn age 59 1/2 (whichever is longer), you will take annual cash withdrawals based on your life expectancy, as predicted by the IRS. If this strategy call me to determine the amount of the annual draw.

Here's an example. If the IRS actuarial tables predict you will live for another 20 years, then you can withdraw 1/20th of the balance in your account the first year. Then 1/19th of your new balance the second year. And so on. During the payout period, your distributions schedule cannot change or you will be penalized. Once the payout period has ended, you can modify the schedule, take a lump payment or stop taking distributions altogether. If you do not want to take annual withdrawals, or want to do the opposite (delay the withdrawals and create large balances for heirs, call me about the stretch IRA).

Withdraw Roth Contributions

The Roth IRA allows penalty and tax-free withdrawals of contributions for any reason. But remember, once you've taken out that money, you don't have the option of replacing it. For 2004, your Roth IRA contribution is limited to $3,000 a year or $3,500 if you will be age 50 or older at the end of 2004 (less if your adjusted gross income exceeds $150,000 if you file jointly; $95,000 if you are single).

Take a 60-Day Loan

You can withdraw funds from your IRA for 60 days tax- and penalty-free as long as you return the funds to an IRA by the end of that time period. The IRS looks at this as a nontaxable rollover, which means that this is a once-a-year option. Just make sure that the funds are back in an IRA within the 60 days, otherwise it will be treated as a withdrawal that is subject to taxes and penalties.

Special Situations

· First-time home purchase: Up to $10,000.

· Qualified education expenses: For you, your spouse, your kids or even your grandkids. Approved expenses include post-secondary education, tuition, books, and supplies. A minimum of ½ time enrollment may be required.

· Disability: To qualify for a disability exemption, you must prove that you are incapable of working.

· Unreimbursed medical expenses: Expenses must exceed 7.5% of your adjusted gross income.

· Health insurance for the unemployed: Only after 12 consecutive weeks of collecting unemployment benefits.

If you Have Self-employment Income

If you have self-employment income you may be eligible to setup a special 401(k) plan for the small business owner.

This strategy might produce a home run for you!

The idea here is to setup the special 401(k) for the sole proprietor or small business owner. After the setup, transfer the rollover amount to your new plan.

After the transfer has been completed —

Consider borrowing from your new 401(k). This leaves your retirement intact — and you get to keep the interest you pay to yourself, instead of a lending institution. [1]

Very truly yours,

Bob Parrish CPA, P.C.

Bob Parrish CPA Engagement Manager

Visit the Bob Parrish CPA PC ConsultingOnLine Web Site http://www.pro1040.com

Technical Analysis AND CITATIONS (“Bean Counter” Stuff)

Are Rollovers Permissible?

Additionally, any distribution from a qualified plan meeting the definition of an “eligible rollover distribution” can be rolled over (in whole or in part— depending upon the “plan document”) into an “eligible retirement plan”. Also, a nontaxable-distribution (although not an eligible rollover distribution) can be rolled over to a traditional IRA or, under certain circumstances, a qualified plan. The rollover must occur within 60 days after the funds are received [IRC Sec. 408(d)(3)(A)]. [2] To the extent rolled over, tax on the distribution is deferred until funds are distributed from the rollover account.

What Plan is Eligible to Receive a Rollover?

What Is an Eligible Retirement Plan? An eligible retirement plan is any of the following [IRC Sec. 402(c)(8)(B)]: [3]

¯ A traditional IRA

¯ A qualified pension, profit sharing, or stock bonus plan.

¯ A governmental Section 457 plan

¯ A 403(b) plan

Are There Exceptions to the 10% Penalty for Withdrawal Prior to Age 59 ½

Yes —

General Rules and Exceptions to Penalty Tax

IRC Sec. 72(t) imposes a 10% penalty tax on the taxable amount of distributions [including a lump-sum distribution (LSD)] from qualified retirement arrangements (including traditional and Roth IRAs and SIMPLE IRAs) received before age 591/2 (i.e., early or premature distributions). The penalty does not apply to distributions that are [IRC Sec. 72(t)(2)]:

1. made upon the death of the employee (does not apply to modified endowment contracts);

2. attributable to the employee becoming disabled;

Note: Disabled is defined as unable to engage in any substantial gainful activity because of any medically determined physical or mental impairment that can be expected to result in death or be of a long-continued and indefinite duration [IRC Sec. 72(m)(7)]. Substantial gainful activity refers to the activity, or a comparable activity, in which the individual customarily engaged prior to the disability [Reg. 1. 72-17A(f)].

3. part of a series of substantially equal periodic payments (an annuity) based on the life of the employee or the joint lives of the employee and a designated beneficiary (see discussion later in this. For distributions from qualified plans other than IRAs, this exception applies only if the employee separates from service;

4. less than or equal to the employee’s Section 213 deductible medical expenses (i.e., medical expenses in excess of 7.5% of AGI), determined without regard to whether the employee itemizes deductions;

5. made to an employee after separation from service after reaching age 55;

6. paid to an alternate payee (generally in connection with a divorce) pursuant to a qualified domestic relations order (QDRO); or

7. made on account of a federal tax levy.

Additional Exceptions for Certain IRA Distributions: In addition to items 1–4 in the preceding list of exceptions, additional exceptions to the 10% penalty exist only for IRA withdrawals (traditional, Roth, and SIMPLE IRAs). These are:

1. Medical Insurance Premiums. Withdrawals up to the amount paid for deductible medical and long-term care insurance (without regard to the 7.5% AGI floor) if the individual (including a self-employed individual) has received unemployment compensation under federal or state law for at least 12 consecutive weeks in the year of the withdrawal or the previous year [IRC Sec. 72(t)(2)(D)]. Because self-employed individuals are not eligible for unemployment compensation, the law treats them as having received unemployment compensation for at least 12 weeks if they would have qualified for unemployment had they not been self-employed. The medical insurance provision does not apply to withdrawals made after the individual has been reemployed for 60 days.

2. Higher Education Expenses. Withdrawals to the extent they do not exceed the qualified higher education expenses of the taxpayer, spouse, or any child, stepchild, or grandchild [IRC Sec. 72(t)(2)(E)]. [4] Qualified higher education expenses are defined the same as for qualified tuition programs. (See footnote [5]) Room and board are included only if the student attends at least half time. The amount of qualified higher education expenses must be reduced for certain scholarships.

3. First-time Home Purchase. Up to $10,000 of cumulative (lifetime) withdrawals used for home buying costs for a first-time homebuyer who is either the taxpayer or the taxpayer’s spouse, child, grandchild, or ancestor or spouse’s ancestor [IRC Sec. 72(t)(2)(F)]. The $10,000 lifetime limit is per individual. Distributions must be used within 120 days after receipt for costs to acquire, construct, or reconstruct a principal residence for an eligible taxpayer who has not (nor has his or her spouse, if married) had any present ownership interest in a principal residence during the two-year period ending on the date of acquisition. If acquisition is delayed or canceled, the withdrawal can be rolled back tax-free into an IRA under the IRA rollover rules, except the rollover period is 120 days rather than the normal 60 days from the date of withdrawal [IRC Sec. 72(t)(8)(E)].

It is important to note that two of the penalty exceptions (for medical expenses and education expenses) are for withdrawals up to the amount of the eligible expenditure. Thus, there is no tracing rule that requires the funds withdrawn from the account be the funds actually used for the expenditure; instead, it is permissible to pay the expenses and withdraw the IRA funds at different times during the tax year. Also, the exceptions allowed only for IRA distributions include IRAs funded with rollovers from employer plans.

End Notes

[1] There are limitations on the loans — please discuss this with me.

[2] §408 Individual retirement accounts.

(3) Rollover contribution.

An amount is described in this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B).

(A) In general. Paragraph (1) does not apply to any amount paid or distributed out of an individual retirement account or individual retirement annuity to the individual for whose benefit the account or annuity is maintained if—

(i) the entire amount received (including money and any other property) is paid into an individual retirement account or individual retirement annuity (other than an endowment contract) for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution; or

(ii) the entire amount received (including money and any other property) is paid into an eligible retirement plan for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received, except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross income (determined without regard to this paragraph).

For purposes of clause (ii), the term "eligible retirement plan" means an eligible retirement plan described in clause (iii), (iv), (v) , or (vi) of section 402(c)(8)(B) .

(B) Limitation. This paragraph does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.

(i) In general. In the case of an inherited individual retirement account or individual retirement annuity—

(I) this paragraph shall not apply to any amount received by an individual from such an account or annuity (and no amount transferred from such account or annuity to another individual retirement account or annuity shall be excluded from gross income by reason of such transfer), and

(II) such inherited account or annuity shall not be treated as an individual retirement account or annuity for purposes of determining whether any other amount is a rollover contribution.

(ii) Inherited individual retirement account or annuity. An individual retirement account or individual retirement annuity shall be treated as inherited if—

(I) the individual for whose benefit the account or annuity is maintained acquired such account by reason of the death of another individual, and

(II) such individual was not the surviving spouse of such other individual.

(D) Partial rollovers permitted.

(i) In general. If any amount paid or distributed out of an individual retirement account or individual retirement annuity would meet the requirements of subparagraph (A) but for the fact that the entire amount was not paid into an eligible plan as required by clause (i) or (ii) of subparagraph (A), such amount shall be treated as meeting the requirements of subparagraph (A) to the extent it is paid into an eligible plan referred to in such clause not later than the 60th day referred to in such clause.

ii) Eligible plan. For purposes of clause (i), the term "eligible plan" means any account, annuity, contract, or plan referred to in subparagraph (A).

(E) Denial of rollover treatment for required distributions. This paragraph shall not apply to any amount to the extent such amount is required to be distributed under subsection (a)(6) or (b)(3).

(F) Frozen deposits. For purposes of this paragraph, rules similar to the rules of section 402(c)(7) (relating to frozen deposits) shall apply.

(G) Simple retirement accounts. In the case of any payment or distribution out of a simple retirement account (as defined in subsection (p)) to which section 72(t)(6) applies, this paragraph shall not apply unless such payment or distribution is paid into another simple retirement account.

(H) Application of section §72.

(i) In general. If—

(I) a distribution is made from an individual retirement plan, and

(II) a rollover contribution is made to an eligible retirement plan described in section 402(c)(8)(B)(iii) , (iv), (v) , or (vi) with respect to all or part of such distribution,

then, notwithstanding paragraph (2), the rules of clause (ii) shall apply for purposes of applying section §72.

(ii) Applicable rules. In the case of a distribution described in clause (i) —

(I) section §72 shall be applied separately to such distribution,

(II) notwithstanding the pro rata allocation of income on, and investment in, the contract to distributions under section §72, the portion of such distribution rolled over to an eligible retirement plan described in clause (i) shall be treated as from income on the contract (to the extent of the aggregate income on the contract from all individual retirement plans of the distributee), and

(III) appropriate adjustments shall be made in applying section 72 to other distributions in such taxable year and subsequent taxable years.

(I) Waiver of 60-day requirement: The Secretary may waive the 60-day requirement under subparagraphs (A) and (D) where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.

[3] § 402 Taxability of beneficiary of employees' trust.

(8) Definitions.

For purposes of this subsection—

(A) Qualified trust. The term 'qualified trust' means an employees' trust described in section 401(a) which is exempt from tax under section 501(a).

Caution: Subpara. (c)(8)(B), following, is effective prior to amendments made by P.L. 107-16. For subpara. (c)(8)(B) as amended by P.L. 107-16, see below. For effective dates of amendments, see note following this Code Sec. For sunset provisions, see Sec. 901 of P.L. 107-16 reproduced in the history of this Code Sec.

(B) Eligible retirement plan. The term 'eligible retirement plan' means—

(i) an individual retirement account described in section 408(a) ,

(ii) an individual retirement annuity described in section 408(b) (other than an endowment contract),

(iii) a qualified trust, and

(iv) an annuity plan described in section 403(a).

Caution: Subpara. (c)(8)(B), following, reflects amendments made by P.L. 107-16. For subpara. (c)(8)(B), effective prior to those amendments, see above. For effective dates of such amendments, see note following this Code Sec. For sunset provisions, see Sec. 901 of P.L. 107-16 reproduced in the history of this Code Sec.

[4] § 72 Annuities; certain proceeds of endowment and life insurance contracts.

(2) Subsection not to apply to certain distributions.

Except as provided in paragraphs (3) and(4) ,paragraph (1) shall not apply to any of the following distributions:

(A) In general. Distributions which are—

(i) made on or after the date on which the employee attains age 59 1/2,

(ii) made to a beneficiary (or to the estate of the employee) on or after the death of the employee,

(iii) attributable to the employee's being disabled within the meaning of subsection (m)(7) ,

(iv) part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary,

[5] Qualified higher education expenses are generally the same as the post-secondary education costs (i.e., does not include expenses for kindergarten through 12th grade). [IRC Sec. 529(d)(3)]. Room and board are included only if the student/beneficiary attends at least half time. Also included are expenses of special needs services for special needs beneficiaries. Although regulations have not yet defined “special needs beneficiaries,” it is expected that the definition will include individuals who, because of a physical, mental, or emotional condition (including learning disability), require additional time to complete their education (Conf. Rpt. to Sec. 401 of the 2001 Tax Act).

Qualified Education Expenses. Qualified education expenses for which ESA funds can be used include tuition, fees, books, supplies, and equipment required for the beneficiary’s enrollment or attendance at any college, university, vocational school or other post-secondary educational institution qualified to participate in the Department of Education’s student aid programs. If the beneficiary takes at least half the normal full-time course load as determined under the standards of the institution and is enrolled in a degree, certificate, or other program leading to a recognized educational certificate at the institution, qualifying expenses also include the school’s room and board amount applicable to the student in calculating the financial aid cost of attending the institution or the actual invoice amount charged to the student, if greater [IRC Sec. 530(b)(2)(A) and 529(e)(3)(B); Prop. Reg. 1.529-1(c)]. Qualified expenses also include contributions to qualified tuition programs.

Starting in 2002, qualified education expenses also include tuition, fees, special needs services for special needs beneficiaries, tutoring, books, supplies, equipment, room and board, uniforms, transportation, and supplementary items and services (including extended day programs) incurred to enroll in or attend an elementary or secondary school (kindergarten through grade 12). Expenses for public, private, or religious schools qualify [IRC Sec. 530(b)(4)]. Although regulations have not yet defined “special needs beneficiaries”, it is expected that the definition will include individuals who because of a physical, mental, or emotional condition (including learning disability) require additional time to complete their education (Conf. Rpt. to Sec. 401 of the 2001 Tax Act). The purchase of computer technology or equipment and Internet access and related services are also qualified education expenses if they are used by the beneficiary and the beneficiary’s family during any of the years that the beneficiary is in school [IRC Sec. 530(b)(4)(A)(iii)].

Pointer: IRC Sec. 530(b)(4)(B) defines the term school to mean any that provide elementary or secondary education, as determined under State law. Presumably, this includes home schooling that meets with applicable State law requirements.

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