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IRAs Can Be Tapped Early Without Penalty

October 03, 1987|DEBRA WHITEFIELD

QUESTION: Last April, your column discussed a revision in the tax law that relaxes the rules for withdrawing money from tax-deferred individual retirement accounts. You said at the time that the Internal Revenue Service had not yet written the regulations for this provision of the 1986 tax act but that it was expected to permit early withdrawals if the payouts were prorated, like an annuity. I have since contacted several brokerage house retirement specialists, and no one seems to know anything about this change. Can you provide more information?--G. H. B.

ANSWER: The IRS regulations are out now, but this remains one of the least-noticed provisions in the new tax law.

Before this year, anyone younger than 59 1/2 who withdrew all or part of the money from his IRA was sharply penalized for doing so. The 10% penalty was waived only in the case of disability or death.

Now, an IRA owner can also avoid the penalty if the money is withdrawn in substantially equal payments over a period that corresponds to the taxpayer's life expectancy. The life expectancy can't be arbitrary, of course. It is figured by using IRS actuarial tables.

Say you are 45 years old, have $250,000 in an IRA and don't want to wait until you turn 59 1/2 to start using your money. Under the new tax law, you are entitled to begin taking out funds without penalty if you agree to limit your withdrawals to about $6,630 a year until the money runs out.

Actually, according to IRS actuarial tables, you would be entitled to withdraw $6,631 the first year and slightly more every year after that.

The payments would grow slightly each year because your life expectancy declines each year and the interest on your retirement contributions increases.

Once the payout plan is established, it can't be altered for five years--unless you reach age 59 1/2 first.

If you break any of these rules, you are slapped with a 10% penalty on the full amount that you withdraw.

Because of the gradual nature of the payout plan, this option clearly isn't for everyone. Taxpayers who are more than a handful of years younger than 59 1/2 may find that their yearly withdrawals are so small that it isn't worth their trouble to craft a payment schedule.

It is a better deal for those who are age 54 1/2 or older. That's because you can dump the annuity-style payout plan after five years, provided you have by then reached age 59 1/2.

The details are available in the Internal Revenue Code, Section 72(t).

Q: Can you explain the meaning of "two jumps and then a stumble?"

A: This is a Wall Street adage meaning that whenever the Federal Reserve Board increases the discount rate twice within a short period of time, stock prices take a dive.

You have probably been hearing the term recently because on Sept. 5, the Fed raised this key lending rate--the rate the Fed charges on loans to U.S. financial institutions--to 6% from 5.5%. It was the first increase in three years, and there has been talk that a second increase is in the offing as the U.S. government takes steps to shore up the dollar, whose value has been sliding all year on foreign currency exchanges.

But back to "two jumps and then a stumble": Market analysts say there is no direct link between rapid increases in the discount rate and a flagging stock market. Rather, they say, the blame for falling stock prices must be placed on the forces that led the Fed to act.

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