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Nonsensical IRA and Roth IRA Items (Part 1 of 3)

I think we can all accept that the Tax Code is confusing. After all, it has to provide the rules for an extraordinarily vast array of circumstances. Sometimes though, the Code goes beyond merely confusing and borders on the bizarre. “Why would Congress do that?” you might ask yourself… and you’re not alone. While there are more than just a handful of bizarre items in the Tax Code, we’ve chosen to highlight three of them that relate directly to IRAs.

Below is the first. Check back over the following two Wednesdays for the second and third bizarre rule.

Ages 59 ½ and 70 ½ as Key Retirement Dates

Seriously? Half years as key age markers? Was someone just thinking hmmm, let’s see how confusing we can possibly make things for people as they retire, just when their lives are supposed to be simplified?

At age 59 ½ you are able to take penalty- free distributions from your IRAs and other retirement plan accounts. Roth IRA distributions after 59 ½ are tax-free for life if they have also met the 5-year rule. 59 ½ is a “hard” date, meaning you must actually be 59 ½ when you take the distribution in order for it to qualify to the tax treatments mentioned above. For instance, if your birthday is January 1st, you turn 59 ½ on July 1st, and must wait until that date to take distributions without those tax consequences.
Age 70 ½, on the other hand, is used as a marker to determine when distributions must be taken out of retirement plans (not a Roth IRA). Unlike age 59 ½ though, age 70 ½ is not a hard date.

Instead, minimum distributions are required to begin for the year in which you turn 70 ½, but distributions made during both before and after the actual 70 ½ date will count towards fulfilling your obligation.

In truth, the use of ½ years may actually have more of a basis than you’d think. Most insurance actuarial tables treat your age as the age you are closest to, and indeed, that appears to be Congress’ intent with the use of 59 ½ and 70 ½. On the day you reach 59 ½, you are closer to being 60 than 59, and thus, treated as being 60 - a nice round number - in most actuarial systems. Similarly, from the time you turn 70 until the day before you turn 70 ½, you are still closer to 70 - another nice round number - than you are to 71. The only issue is that most Americans are not actuaries and don’t think in terms of half years. In reality, the use of half years has probably caused far more confusion among the American public than it’s worth.

By Jeffrey Levine and Jared Trexler
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*Copyright 2011 Ed Slott and Company, LLC


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Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

Can I transfer money from my IRA to my husband's Roth IRA? I am 35, and he is 36.

Thank you!

Gail Clements

No. The only way your IRA funds can be transferred to your husband’s IRA is in a divorce or after your death. Even then, it would have to be transferred to a similar IRA, for example an IRA to IRA or a Roth IRA to another Roth IRA. In this case, you cannot transfer your IRA into your husband’s Roth IRA.