Early Distribution from Retirement Plan & Taxes

Considering the current economic conditions, most of us are turning to our retirement funds for financial needs. However, we need to be aware of the tax consequences that may follow with such distributions.

Since the contributions to these plans are made from our before tax dollars (I have excluded Roth contributions/plans from the discussion here), the distributions when taken out will be fully taxable. In addition,the law imposes a 10% additional tax on early distributions from a qualified retirement plan or deferred annuity contract before reaching age 59 1/2. Whereas you cannot get out of the resulting tax liability, you may be able to save the early withdrawal penalty.

There are certain exceptions to 10% early withdrawal penalty.

The following six exceptions apply to distributions from any qualified retirement plan:

1. Distributions made to your beneficiary or estate on or after your death.
2. Distributions made if you are are totally and permanently disabled.
3. Distributions made as part of a series of substantially equal periodic payments over the life expectancy of the owner or life expectancies of the owner and the beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.
4. Distributions that are equal to or less than your deductible medical expenses, that is, the amount of your medical expenses that is more than 7.5% of your adjusted gross income.
5. Distributions made due to an IRS levy of the plan.
6. Distributions to qualified reservists.

The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

1. Distributions made to you after you separated from service with your employer (State or local government), if the separation occurred in or after the year you reached age 55 or distributions from qualified governmental defined benefit plans if you were a qualified public safety employee who separated from service on or after you reached age 50,
2. Distributions made to an alternate payee under a qualified domestic relations order(QDRO), and
3. Distributions of dividends from employee stock ownership plans.

Time is running out for all those who can benefit from IRA conversion in 2010

Beginning in 2010, the rules for conversions of traditional IRA money to a Roth IRA are changing by eliminating the MAGI limitations and hence, making more investors eligible to convert their traditional IRAs to Roth IRAs.

However, look before you leap....just because you can convert to a Roth IRA doesn't necessarily mean that you should.
First of all, you need to evaluate if you should convert the traditional IRA to Roth. There are various factors to consider including the age to retirement, your income source at retirement, your need for funds, tax rates in future and appreciation expected in these accounts.

If you are already retired and over 59 1/2 years than you can take distribution over a period of time and spread the taxes over a number of years.

Higher your tax bracket, the more tax you will have to pay on conversion. But if you expect taxes to go up in the long term, conversion will make sense as you may have to pay a higher tax rate on these distributions later.

Also to note is the special tax treatment for Roth IRA conversions available for 2010 which allows taxpayers to spread the taxes due on the conversion over two years and thus making the tax burden much easier to handle by requiring only one-half of the taxes to be paid during 2011 and the other half of the Roth conversion taxes to be paid in 2012.

Feel free to contact for a detailed evaluation considering your financials facts and long term goals.

2009 Pension Plan Limits

IRS has announced the 2009 Pension plan limits.
Accordingly,

• 401(k) or 403(b) Deferral Limit - $16,500 and Catch-Up Contribution Limit(Age 50 or older) - $5,500
• Simple IRA Account Deferral - $11,500 and Catch-Up Contribution Limit(Age 50 or older) - $2,500
• Maximum annual contribution to 401 (k) or SEP IRA - $49,000
• Maximum Compensation Limit - $245,000