Stupid Question: How do I calculate 59 1/2?

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Stupid Question: How do I calculate 59 1/2?

Postby dawaba » Fri Jan 14, 2011 9:23 am

I cannot seem to find a straight answer on what should be a very easy question. I was born July 31, 1952. Therefore, I turn age 59.5 on January 31, 2012. Can I start taking penalty-free withdrawls from my IRA at this time, or must I wait until the calendar year after I turn 59.5? Then the penalty-free date would be January 1, 2013.

I remember reading somewhere that RMDs at age 70.5 were calculated on the basis of the calendar year after a person turns 70.5. If this is true, does this formula also apply to withdrawls at 59.5?
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Postby tomd37 » Fri Jan 14, 2011 10:22 am

My opinion is that you turn age 59.5 six months and a day after your 59th birthday.

As to the RMD scenario you mention...RMDs are based on attainment of age 70.5. You must take your first RMD by April 1st of the year after you attain age 70.5. That date is also referred to as your required beginning date (RBD). If you wait to take your first RMD in the year after you attain age 70.5, you will have to take two RMDs that year. That could possibly put you in a higher marginal tax bracket and also possibly lead to taxation or higher taxation of any social security benefits and other taxable income.

You can safely (i.e., no early withdrawl penalty) withdraw from your IRA six months and a day after your 59th birthday. Any earlier and you could incur a penalty.

Let's see if others agree or disagree.
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Postby sscritic » Fri Jan 14, 2011 10:25 am

An account owner must take the first RMD for the year in which he or she turns 70 ½. However, the first RMD payment can be delayed until April 1st of the year following the year in which he or she turns 70 ½. For all subsequent years, including the year in which the first RMD was paid by April 1st, the account owner must take the RMD by December 31st of the year.

Note that you do not have to take your first RMD on the day you turn 70 1/2. You take it during the year (extended to the following April 1st).

If an IRA is cashed in before age 59 1/2, what forms need to be filled out?

Regardless of age, the IRA owner will need to file a Form 1040 and show the amount of withdrawal from the IRA. Since the withdrawal was taken before reaching age 59 1/2, unless certain exceptions listed in Publication 590 Individual Retirement Arrangements (IRAs) are met, the IRA owner will need to pay an additional 10 percent tax on early distributions from qualified retirement plans that is reported on Form 1040.

Note that is does not say before the year in which you turn 59 1/2 or the year after you turn 59 1/2.

A year is a year and a date is a date.
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Postby KyleAAA » Fri Jan 14, 2011 10:26 am

Whose idea was it to tack the 1/2 onto the end, anyway? Could anything possibly be less-intuitive?
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Postby dawaba » Fri Jan 14, 2011 10:30 am

KyleAAA wrote:Whose idea was it to tack the 1/2 onto the end, anyway? Could anything possibly be less-intuitive?


Yeah, the "1/2" unessessarily complicates what should be a simple issue. Thanks for clarifying.
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Postby zaplunken » Fri Jan 14, 2011 10:35 am

KyleAAA wrote:Whose idea was it to tack the 1/2 onto the end, anyway? Could anything possibly be less-intuitive?


Take 1 guess.... Congress!

I called Vanguard to verify that the date I thought would be the date (59 1/2 not RMD date) and I was correct. Call them, they can tell you.
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Postby OhioGozaimas » Fri Jan 14, 2011 10:51 am

From 2010 Form 5329, Additional Taxes on Qualified Plans…

Part I Additional Tax on Early Distributions
Complete this part if you took a taxable distribution before you reached age 59½ from a qualified retirement plan (including an IRA)…” [Emphasis added.]

http://www.irs.gov/pub/irs-pdf/f5329.pdf
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Postby MarkNYC » Fri Jan 14, 2011 10:52 am

KyleAAA wrote:Whose idea was it to tack the 1/2 onto the end, anyway? Could anything possibly be less-intuitive?

I believe insurance company actuarial tables consider a person to be age 60 as soon as they reach 59 1/2, and a person remains age 70 until they reach 70 1/2. I'm not saying I agree with the logic of using those half-years, but I think this is how Congress came up with the dates .
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Re: Stupid Question: How do I calculate 59 1/2?

Postby BigFoot48 » Fri Jan 14, 2011 11:02 am

dawaba wrote:I cannot seem to find a straight answer on what should be a very easy question. I was born July 31, 1952. Therefore, I turn age 59.5 on January 31, 2012. Can I start taking penalty-free withdrawls from my IRA at this time, or must I wait until the calendar year after I turn 59.5?

You can also take penalty-free withdrawals prior to becoming 59.5 using the substantially equal periodic payments (SEPP) IRS procedure. I know this as I did it.
Last edited by BigFoot48 on Fri Jan 14, 2011 11:16 am, edited 1 time in total.
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Postby tomd37 » Fri Jan 14, 2011 11:06 am

The agency issuing the 1099-R will place a distribution code in box 7 of the form; if the funds are distributed before age 59.5 the form will contain a code which will subject the owner to an early withdrawl penalty. Be safe and wait until you have attained the proper age. That said, there are also exception codes that can be applied when submitting your tax return if you qualify for such exception. That might relieve you of the early withdrawl penalty, but not the regular tax due.
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Postby Ron » Fri Jan 14, 2011 11:18 am

tomd37 wrote:...there are also exception codes that can be applied when submitting your tax return if you qualify for such exception.

Be aware that the company doing the distribution before the age of 59.5 due to an exception probably will not code the 1099 as such, due to IRS guidelines.

My (disabled) son needed to liquidate his Roth IRA, for living expenses. Vanguard was notified and supplied with the documentation that confirmed his disability (including a finding from the SSA, who granted his SSD).

Regardless, VG put a normal distribution code in the 1099. When I requested a corrected copy, they informed me that they could no longer put an exception code in the 1099, per the IRS, and I would have to notify the IRS as to the exception.

Even though attaching documents to my son's federal return, it took us two years to go through IRS letters related to fines, asset seizure, etc, along with the intervention of the IRS taxpayer advocate office and even my local congressman to get it straightened out.

Just to relate that exception codes are fraught with their own risk :roll: ...

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Postby grabiner » Fri Jan 14, 2011 9:53 pm

tomd37 wrote:My opinion is that you turn age 59.5 six months and a day after your 59th birthday.


In most legal interpretations, the day goes the other direction, so the OP would legally be 59.5 on January 30, 2012 (with a July 31 birthday).

This does apply in many tax situations; if you were born on January 1, 1946, you are considered to be 65 on December 31, 2010, and can take the higher standard deduction this year.
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Postby sscritic » Fri Jan 14, 2011 10:43 pm

grabiner wrote:This does apply in many tax situations; if you were born on January 1, 1946, you are considered to be 65 on December 31, 2010, and can take the higher standard deduction this year.

Pub 501 confirms this:
Age is a factor in determining if you must file a return only if you are 65 or older at the end of your tax year. For 2010, you are 65 or older if you were born before January 2, 1946. ...
...
If you do not itemize deductions, you are entitled to a higher standard deduction if you are age 65 or older at the end of the year. You are considered 65 on the day before your 65th birthday.

Therefore, you can take a higher standard deduction for 2010 if you were born before January 2, 1946.

Apparently this goes back to English common law and when you attain an age. This is the terminology used by Social Security. It is similar to complete a year. If you were born on 1/1/46, the last day of the first year of your life is 12/31/46. 1/1/47 is the first day of the second year of your life. You attain age one on 12/31/46. Similarly, 12/31/2010 is the last day of the 65th day of your life. 1/1/2011 is the first day of the 66th year of your life. You attain age 65 on 12/31/2010.
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Postby Watty » Sat Jan 15, 2011 12:51 am

KyleAAA wrote:Whose idea was it to tack the 1/2 onto the end, anyway? Could anything possibly be less-intuitive?


How about;

For some tax rules dosn't January 1st sometimes count as being in the prior year?

Trying to calcilate a half non-leap year is 365/2=182.5 days. Does that extra half a day mean that it matters if you make a trasaction before or after noon on day 182?

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Postby grabiner » Sat Jan 15, 2011 1:32 am

Watty wrote:
KyleAAA wrote:Whose idea was it to tack the 1/2 onto the end, anyway? Could anything possibly be less-intuitive?


How about;

For some tax rules dosn't January 1st sometimes count as being in the prior year?


It's only for ages; if your birthday is January 1, you are treated as having reached that age for tax purposes on the previous December 31.

For many other purposes, the year is lengthened by a day; if you bought a stock on January 14, 2010 and sold it on January 14, 2011, you would have a short-term gain. And I believe it was mentioned that if you bought a stock on February 28, 2007 and sold it on February 29, 2008, that is also a short-term gain; the holding period began on March 1, 2007.
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Postby tomd37 » Sat Jan 15, 2011 1:48 am

Ron,

There isn't a block on the 1099-R for the issuing company to check for an exception. They code the form as usual with a distribution code in block 7 and the taxpayer can claim the exception by the use of Form 5329. On the software the is a box below box 7 where you check and it will for the Form 5329. That form is where the appropriate exception code is entered. This form also has a block to check for an exception code for a distribution due to total and permanent disability.
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Postby Buckeye » Sat Jan 15, 2011 3:07 am

My understanding is that:

If your birthday is during Jan thru June then you can access Jan. 1st of the year you turn 59.

If your birthday is during July thru Dec then you can access the Jan. 1st after you turn 59.
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Postby The Wizard » Sat Jan 15, 2011 8:35 am

Buckeye wrote:My understanding is that:

If your birthday is during Jan thru June then you can access Jan. 1st of the year you turn 59.

If your birthday is during July thru Dec then you can access the Jan. 1st after you turn 59.

Your understanding is incorrect, sorry.
183 days after your 59th birthday is the correct date.
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Postby sscritic » Sat Jan 15, 2011 9:32 am

grabiner wrote:For many other purposes, the year is lengthened by a day; if you bought a stock on January 14, 2010 and sold it on January 14, 2011, you would have a short-term gain.

I wouldn't call that lengthening the year. If your birthday is January 14, your next birthday is the next January 14, exactly a year later. The gain is short-term because short-term gains are for holding periods of one year or less. January 14 to January 14 is one year; hence, it is short-term.
If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss.
http://www.irs.gov/publications/p17/ch1 ... 1000172339

The holding period doesn't include the day of purchase, but then tomorrow is one day, not two days, from now, so I wouldn't call that lengthening anything; that's how we count days.
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Postby dm200 » Sat Jan 15, 2011 6:01 pm

The Wizard wrote:
Buckeye wrote:My understanding is that:

If your birthday is during Jan thru June then you can access Jan. 1st of the year you turn 59.

If your birthday is during July thru Dec then you can access the Jan. 1st after you turn 59.

Your understanding is incorrect, sorry.
183 days after your 59th birthday is the correct date.


I do not think it is a number of days, but rather counting months and days. Since different months have different numbers of days, six months (1/2 year) and a day can be a different number of days, and adding a leap year further complicates number of days. Six months plus one day, I think, unless it is exactly six months.

One version I heard was that some wanted the age to be 59 and some wanted 60 -- so they compromised at 59 1/2.
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Postby Ron » Sun Jan 16, 2011 10:36 am

tomd37 wrote:Ron,

There isn't a block on the 1099-R for the issuing company to check for an exception. They code the form as usual with a distribution code in block 7 and the taxpayer can claim the exception by the use of Form 5329. On the software the is a box below box 7 where you check and it will for the Form 5329. That form is where the appropriate exception code is entered. This form also has a block to check for an exception code for a distribution due to total and permanent disability.

His return was done before we used TT, and done manually :roll: You know, back in the days when you actually received blank tax forms in the mail on January 2nd.

Block #7 on the 1099 was coded with a "1" (Early distribution, under age 59.5, no known exception - even after notifying VG, rather than code "3"). BTW, VG did say that they coded the corrected 1099 with an exception in the past if proper documentation was provided, but the rules by the IRS had been changed the year before, in 2004 and they could no longer do this.

Regardless, with all the (certified) mail going back between me and the IRS (both in notation on the original return with supplemental paperwork, including the finding of SSA three years previously of his total disability) and four additionial mailings (along with documentation from the Taxpayer's Advocate and my congressman's office) you would think sombody would have a handle on this, and it would not take two years of dunning letters and threats of property seizure (against my son) to get this straightened out. Heck, he continued to get letters from the IRS even after my congressman's office said that he would receive no more until the matter was resolved and they notified me through their office to the findings.

I have some choice words for the IRS but I'm sure I don't need to say them - just read my mind :roll: ...

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Postby MarkNYC » Sun Jan 16, 2011 12:57 pm

Ron wrote:
tomd37 wrote:Ron,

There isn't a block on the 1099-R for the issuing company to check for an exception. They code the form as usual with a distribution code in block 7 and the taxpayer can claim the exception by the use of Form 5329. On the software the is a box below box 7 where you check and it will for the Form 5329. That form is where the appropriate exception code is entered. This form also has a block to check for an exception code for a distribution due to total and permanent disability.

His return was done before we used TT, and done manually :roll: You know, back in the days when you actually received blank tax forms in the mail on January 2nd.

Block #7 on the 1099 was coded with a "1" (Early distribution, under age 59.5, no known exception - even after notifying VG, rather than code "3"). BTW, VG did say that they coded the corrected 1099 with an exception in the past if proper documentation was provided, but the rules by the IRS had been changed the year before, in 2004 and they could no longer do this.

Regardless, with all the (certified) mail going back between me and the IRS (both in notation on the original return with supplemental paperwork, including the finding of SSA three years previously of his total disability) and four additionial mailings (along with documentation from the Taxpayer's Advocate and my congressman's office) you would think sombody would have a handle on this, and it would not take two years of dunning letters and threats of property seizure (against my son) to get this straightened out. Heck, he continued to get letters from the IRS even after my congressman's office said that he would receive no more until the matter was resolved and they notified me through their office to the findings.

I have some choice words for the IRS but I'm sure I don't need to say them - just read my mind :roll: ...

- Ron

If an IRA distribution is made prior to age 59 1/2, it is proper for the IRA custodian to show on Form 1099-R the distribution Code 1 "Early Distribution, No Known Exception" if none of the exceptions to the 10% penalty are known by the custodian to apply. But for certain distributions that are known to be exempt from the penalty, the custodian should use Code 2 "Early Distribution, Exception Applies". An example would be a TIRA conversion directly to a Roth. Code 3 for Disabiity and 4 for Death are also codes that indicate exceptions to the penalty. If one of the penalty exception codes is shown on the 1099-R, there is no need to file Form 5329. If Code 1 is listed and the taxpayer uses the funds for a purpose that allows an exception to the penalty, then Form 5329 must be filed.

Ron - Code 3 for Disability is still in use, so it sounds like the Vanguard representative did not give you a clear or correct explanation for their unwillingness to use Code 3. Unfortunately, due to the nature of our tax system, sometimes a taxpayer can report things properly and still get caught up in a frustrating bureaucratic hassle.
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Postby Ron » Sun Jan 16, 2011 1:16 pm

MarkNYC wrote:Ron - Code 3 for Disability is still in use, so it sounds like the Vanguard representative did not give you a clear or correct explanation for their unwillingness to use Code 3. Unfortunately, due to the nature of our tax system, sometimes a taxpayer can report things properly and still get caught up in a frustrating bureaucratic hassle.

Heck, I'm used to "bureaucratic hassles" (I was drafted, a long, long time ago, and spent a nice "vacation" in SEA)...

I've learned long ago that the government is lacking in common sense :roll: ...

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Postby BigFoot48 » Sun Jan 16, 2011 1:21 pm

I didn't have all this great info when I turned 59.5 and wanted to end my SEPP withdrawals, so I just added a month and a half (I was born on the 15th) to when I thought it was, just to be sure.
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Postby dawaba » Sun Jan 16, 2011 6:25 pm

Thanks, everyone. I really appreciate all the replies. I don't feel so stupid about posting the question now.
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Postby Eureka » Mon Jan 17, 2011 12:05 am

This is tangential, since the OP apparently doesn't want to make an IRA distribution before age 59.5. But because other replies mentioned the issue of taking penalty-free distributions before that age, this website offers excellent information on the subject: http://www.72t.net/

Discussions on that site have pretty much established that there is no way in hell Vanguard will correctly code the exception on Form 1099. It's not clear exactly why; perhaps Vanguard thinks this would somehow "endorse" the accuracy of the 72(t) calculation made by the taxpayer. I don't think it has anything to do with a change in IRS regulations or procedures, but very few other IRA custodians will do correct coding for this exception, either.
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