Short of Cash? Avoid this Mistake!

Circumstances can occur that pressure people to withdraw money from their retirement account before their retirement date. This pressure can be created when a person is laid off from a job. It can be created when you need to pay an attorney to keep a fair haired son out of prison. Maybe a Mom and Dad feel the need to pay for their daughter’s wedding. The range of circumstances creating financial pressure that tempts a person to withdraw money from an IRA or retirement plan is wide and various. Giving in to this temptation can be costly.

If you have a traditional IRA or funds in an employer sponsored retirement account, you generally have to include any amount withdrawn from this account in your taxable income. If you haven’t reached age 59 ½ when you withdraw money from a retirement account, a 10% penalty is imposed on the taxable portion of the distribution. In Arkansas, the penalty for early withdrawal of funds from a retirement account is 1% of the taxable distribution. So let’s do some simple arithmetic.

Attention IRA Owners Over 70 1/2


The American Taxpayer Relief Act of 2012 extended a “taxpayer friendly” provision for 2012 and 2013 which provides for a “qualified charitable distribution” from a taxpayer’s Individual Retirement Account (IRA). This provision, which had “sunset” at the end of 2011, was widely expected not to be renewed.

A “qualified charitable distribution” (QCD) is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70 ½ or over that is paid directly from the IRA to a qualified charity. An IRA owner can exclude from gross income up to $100,000 of a qualified charitable distribution made for a year, and the “QCD” can be used to satisfy any required minimum distributions from the IRA for the year. The amount of a QCD excluded from gross income is not taken into account in computing your charitable contributions for the year. In other words, there is not a benefit.

The IRA owner can treat a contribution made to a qualified charity in the month of January 2013 as a 2012 qualified charitable distribution in either of the following circumstances: