PREMATURE WITHDRAWALS AND INSUFFICIENT DISTRIBUTIONS

Premature withdrawals are those that occur before the individual reaches age 59½. The IRS levies a penalty tax of 10 percent of the amount withdrawn if funds are withdrawn prematurely. No penalty tax is charged in the following situations:

Attainment of age 59½ Periodic payments made in the form of a life annuity Deductible medical expenses Buying a home for the first time if the home is to be a principal residence. The limit is $10,000 over the homebuyer's life. Qualifying health insurance premiums if the individual is unemployed for at least twelve weeks Qualifying educational expenses Disability or death

Individuals are required to take distributions from their accounts at least once per year once they reach the age of 70½, and they must withdraw certain minimums figured by the IRS. If they fail to, they will be penalized for insufficient distributions. This penalty is half of the amount they did not withdraw. For example, if you are required to withdraw $300 during a certain time and withdraw only $200, you will be required to pay half of the $100 difference, or a penalty of $50.

The IRS provides life expectancy tables one can use to calculate the required minimum distribution after age 70½. You may use one of the following methods as long as it meets the minimum distribution requirement:

Division of the account balance by your life expectancy from the appropriate table each year. Conversion to a life annuity (or life and joint survivor)

You can always take more but not less then the required minimum distribution. However, you get the greatest tax savings by only taking the required minimum distribution.

Now let's review what we have learned.