Structuring IRA Distributions To Prevent Penalties - Protected Harbor Planning: A Few Helpful Ways 

IRA distribution rules are a mine field. One incorrect move and you could discover yourself faced with high taxes and penalties which could wipe out years of savings and investment. Complicating issues is the Darwinian evolution of IRAs which have taken place since the pioneer IRA was introduced in '74 with the enactment of the Employee Retirement Income Security Act (ERISA ). Since '74, IRA rules have altered dramatically and legislation was enacted to rigorously punish those who don't follow the rules, to the letter of the law. IRAs come in lots of flavors but, for purposes of this article we'll focus on the two chief types of IRAs: Traditional IRAs and Roth IRAs.

Methods for Minimizing Penalties on Early Distributions

Generally, any distribution from an IRA before you reach age 59 1/2 is considered an early distribution and is matter of a ten percent penalty on the taxable amount received in a distribution. There're certain IRA distribution rules that could be used to avoid the imposition of this early withdrawal penalty.

1. Using IRA Funds to Buy or Construct Your First House - Up to $10,000 might be withdrawn from an IRA as an early distribution penalty-free, as long as the distribution is used to purchase, build or rebuild a first home for yourself, your wife, you or your spouse's kid, you or your spouse's grandchild or you or your wife's parent or ancestor.

2. Using IRA Money for Medicinal Costs - Penalty-free early distributions could be made if the funds are used to pay unreimbursed medicinal bills which exceed 7.5 % of your adjusted gross income. There is no requirement to itemize deductions to qualify for this exception.

3. Using IRA Money for College Expenses - Conventional IRAs can also be tapped to aid fund school expenses; however, the taxable amount of the distributions from these IRAs shall be matter of income tax in the year of the distribution.

Roth IRA distribution rules

Roth IRAs have unique regulations with respect to distributions. Contributions withdrawn are not matter of the ten percent penalty and there is no RMD with Roth IRAs. So as for Roth IRA earnings distributions to be tax-free, the account should have been opened for five years and the distributions must be made after reaching age 59 1/2. If you meet the five-year rule but not the 59 1/2 year regulation, distributions in excess of your contributions might be taxable and matter of a 10% penalty.

1. No RMD - With Roth IRAs, there is no RMD at age 70 1/2. This means a Roth IRA owner is never needed to make a distribution out of their Roth IRA. As a result, Roth IRAs can grow, untaxed, during the lifetime of the owner, permitting a larger legacy for their beneficiaries.

2. 0% Effective Tax Rate - Qualified distributions from Roth IRAs are not subject to income tax...ever. This means you are unaffected by future tax increases as your effective tax rate is always the same...zero.

3. Conversion Possibilities - Beginning after January 1, 2010 anybody, irrespective of their income level, may convert conventional IRAs into Roth IRAs. The tax on the taxable income for 2010 conversions can be deferred into 2011 and 2012. If you don't have enough money set aside to do a 100% conversion you can do partial conversions.

4. College Expenses - Because Roth IRA contributions might be withdrawn, tax-free, penalty-free, at any time, this kind of contributions can be a tax-free future funding source for your child's school expenses.