Distributions

Distributions

We are pleased that you have made the commitment to save for your retirement with a Traditional or Roth IRA through Southern Chautauqua Federal Credit Union. This type of investment will allow you to enjoy certain tax advantages. The time may come when you will want to receive money from your IRA. The good news is you can receive funds at any time. You may have to pay some tax, and penalty may be imposed but the funds are always available. Because IRA distributions may be subject to tax and penalty, having an understanding of the rules before you withdraw money from an IRA is important.

Traditional IRA Distributions

The rules governing taxation of and penalties for, Traditional IRA distributions depend on your age and the circumstances under which you take a distribution. Generally, any amount distributed to you will be taxable unless you have made nondeductible contributions to your Traditional IRA or rolled over after-tax funds from a workplace retirement plan.

When you take a distribution from a Traditional IRA, it is generally combined with all of your other Traditional IRAs (but not your Roth IRAs) for taxation and penalty purposes.

Distributions Prior to Age 59 ½

Taxable amounts you withdraw from your Traditional IRA prior to age 59 ½ may be subject to the IRS early distribution penalty. The penalty will not apply if any exception applies such as disability, first-home purchase, death, higher education expenses, equal periodic payments, certain deductible medical expenses, purchase of health insurance by certain unemployed individuals or IRS levy. These conditions are general and each situation is unique. We strongly recommend that you consult with a tax specialist prior to making a withdrawal.

Distributions Between Ages 59 ½ and 70 ½

Distributions from your Traditional IRA are completely flexible if you are between the ages of 59 ½ and 70 ½. Such distributions are not subject to IRS early distribution penalty.

Distributions After Age 70 ½

When you reach the year in which you attain age 70 1/2, required minimum distributions have changed. Here are some general guidelines:

• You must generally begin to receive required minimum distributions from your Traditional IRA for the year you reach age 70 ½.
• You must take the distribution for that year by your required beginning date. Distributions for all years subsequent to the first year must be taken by December 31 of each subsequent year.
• You may take more than your required minimum distribution if you choose.
• If you have more than one Traditional IRA, you do NOT have to take a distribution from each one.

The rules for determining your required minimum distribution:

Multiply the fair market value at the end of the prior fiscal year by the multiplier based on your age to get the amount of the required minimum distribution for the full year. Divide that number by 12 for a monthly total required minimum distribution.

*These conditions are general and each situation is unique. We strongly recommend that you consult with a tax specialist prior to making a withdrawal.

Roth IRA Distribution

Distributions from Roth IRAs are treated as being paid in the following order:

• Regular and spousal IRA contributions
• Earnings

Regular and Spousal Contributions:

Distributions are treated as first being paid from your accumulated regular and spousal Roth IRA contributions. The distribution of regular or spousal Roth IRA contributions is always tax-free and penalty-free, regardless of when the contribution was made, how old you are when you take the distribution, or why the distribution was taken.

Earnings:

When you take a Roth IRA distribution, earnings are treated as being distributed last. Earnings are tax and penalty free if they are distributed in a qualified distribution. A distribution from a Roth IRA is a qualified distribution if it is paid:

*Qualified Distribution – A withdrawal is a qualified distribution if:

• Paid to you after you attain age 59 ½.
• Must be invested at least five years. (Roth IRA)
• Must be paid after a five-taxable year period that begins with the earlier of:
  
  • The first taxable year for which you made a Roth IRA contribution.
  • The first taxable year in which you converted from Traditional to Roth.
• Paid to you when you are disabled.
• Paid to you for a qualifying home purchase.
• Paid to your beneficiary after your death.

If a withdrawal from a Roth IRA is a qualified distribution, it is NOT subject to federal income tax. A qualified distribution is also exempt from the IRS 10% early distribution penalty.

A distribution that is not a qualified distribution may be taxable and may be subject to the IRS 10% early distribution penalty. Confer with your trusted tax preparation specialist for more specific guidance.

Distributions to your Beneficiary(ies) From Your Traditional or Roth IRA

You may designate a beneficiary (ies) to receive the assets in your IRA after your death. If you have a Traditional IRA and you die before your required beginning date, or you have a Roth IRA, your beneficiary(ies) has two options:

• The Five-Year Rule: Under this option, the beneficiary must withdraw the funds by the end of the fifth year after the year of death. The funds may be taken in any manner during the five-year period.
• Life Expectancy Rule: Under this option, the beneficiary may withdraw funds over his own single life expectancy or any shorter period.

If you have a Traditional IRA and you die on or after your required beginning date, your beneficiary must generally take distributions from your Traditional IRA based on a single life expectancy.

If your spouse is your beneficiary, he or she may roll over or transfer your IRA to his or her own IRA.

Remember, the rules for withdrawing from your IRA can be complex. It is important for you to speak to tax advisor before you take a distribution. Call (716) 665-7000 to schedule an appointment with our IRA Specialist.