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Age 59 1/2: A Day Early or Day Late Is a 10% Difference

For many who have IRAs, they are looking to use those funds in a down economy. But IRA distributions come with strings attached. There is income tax due on most IRA distributions since IRA funds are generally pre-tax funds.

There is also an early distribution penalty of 10% of the taxable amount of the distribution for those under age 59 ½. So when exactly are you 59 ½ in order to avoid this penalty? The tax code says you are exempt from the penalty if the distribution is taken “on or after the date” you turn 59 ½. In other words if you turn 59 ½ on July 1st, then any distribution you take prior to July 1st is subject to the penalty. Any distribution taken on or after July 1st will not be subject to the penalty. Just to be sure, I would wait until July 2nd before taking the distribution.

Keep copies of your distribution request or proof of the date of the distribution just in case there is a question as to whether or not you are subject to the penalty. If the 1099-R is issued showing a distribution subject to the penalty, you can correct that reporting by filing Form 5329 with your return and indicating the correct code that should have been on the form.

With IRAs, it all comes down to the details. This is one detail you want to make sure you get right or it will cost you 10%.

-By Beverly DeVeny and Jared Trexler


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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.