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Age Matters for IRA Withdrawals

February 18, 1996|CARLA LAZZARESCHI

Q. I will turn 59 1/2 later this year. May I make my first withdrawal from my IRA now without incurring any of the early withdrawal penalties?



A. A careful reading of the Internal Revenue Code and a variety of tax manuals leaves just one conclusion: You must wait at least until the exact date you turn age 59 1/2 before making your first IRA withdrawal if you want to avoid the 10% federal and 2.5% California state penalties levied on early disbursements.

What happens if you don't wait? Again, a careful understanding of the tax code would seem to have us conclude that the government would have little way of finding out--absent a full audit--of a withdrawal prior to the actual date of turning age 59 1/2 so long as the disbursement was made in the appropriate tax year.

Why? Because such disbursements are generally reported on an annual basis and as long as the tax year was the correct one, the exact date of the withdrawal typically generates little interest.

By the way, you can receive distributions before age 59 1/2 without the penalty if you are disabled or if you commit to a long-term, annuity-type distribution.

For more information about IRA withdrawals similar issues, you may order IRS Publication 590, Individual Retirement Arrangements, by calling (800) 829-3676. The material can also be downloaded on your computer from the new IRS home page on the Internet. The address is

Tax-Free Gifts Aren't Tax Free for Donor

Q. Can you explain how I can give away money tax free? --R.T.


A. For starters, let clear up one thing: There is precious little in life that is tax free, including so-called tax-free gifts. Despite the name, you can be sure that taxes have been exacted on these funds at some point along the economic food chain.

Here's what happens under current law:

Uncle Sam allows every taxpayer to give away up to $600,000 over his or her lifetime in gifts that are tax free to the recipient or recipients.

These gifts are generally not seen as tax-free for the donor, since they are from after-tax assets. In a sense, there is an exception if the donor received tax-free gifts or inheritances from someone else.

Once the $600,000 threshold is crossed, donors are liable for taxes on the amount in excess of that maximum. Tax rates start at 37% and are graduated up to 55% (on $3 million).

In addition to the $600,000 described above, the government also allows each of us to give any other individual up to an additional $10,000 per year that does not count toward the lifetime limit. But again, the gift is only tax-free to the recipient--there is no tax benefit to the donor. Any amount over $10,000 given to an individual in a single year is deducted from the $600,000 lifetime limit.

Are you still interested in "tax-free" gifts?

Ways to Find Original Stock Purchase Price

Q. During my husband's employment at the Todd Shipyards in San Pedro, he purchased many shares of the company via the payroll deduction plan. He retired in 1981 and the shipyards have since been closed. How do we find out how much he paid for those shares so we can determine our losses when we sell?



A. Although the Todd shipyards here have been closed for several years, the company--or at least its successor--is still in business under a Chapter 11 bankruptcy reorganization plan approved in 1991. You can contact Todd Shipyards Corp. by writing to the company at 1801 16th Ave. SW, Seattle, WA 98134 or by calling its investor relations department at (206) 623-1635.

That said, it remains unclear whether the company will have the necessary payroll records you will need to research your stock purchases. Any information you can offer by providing dates of purchases would serve you well. Otherwise, you will have to pay a private stock research company or you will need to go to the public library to track the value of Todd shares during the years you purchased them.

If you know the dates or approximate dates of your purchases, you can look up the stock's trading prices in old Standard & Poor's annual guides or on the microfiche of a newspaper's stock tables from those years. If this is too tedious for you, a stock research company will do the work for you--for a price. Try contacting Prudential American Securities at 921 E. Green St., Pasadena, CA 91106. This company offers the least expensive research service we know.

Whether you do your own research or hire someone, you will have to know how many shares you received in each purchase to accurately determine your cost basis in the shares.

Your situation underscores the importance of keeping accurate and up-to-date financial records.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Send e-mail to carla.

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