persfi/may/mike1st/mark2nd MEL POTESHMAN The tax legislation signed into law by President Clinton in 1996 includes several provisions that affect Individual Retirement Account (IRA) distributions. Current tax law allows you to start taking money out of your IRA in any amount without penalty once you reach age 59 and a half. If you take money out before the date you turn 59 and a half, you might be subject to a 10-percent early withdrawal penalty. One way to avoid this penalty is by withdrawing the money as an annuity that is, in annual installments based on your life expectancy. The 1996 tax law allows an exception for taxpayers with substantial medical expenses. Beginning in 1997, IRAs can be tapped penalty-free at any age when the funds are used to pay medical expenses that exceed 7.5 percent of the taxpayer’s adjusted gross income. Individuals who’ve received unemployment compensation for at least 12 consecutive weeks are allowed penalty-free withdrawals from an IRA (without regard to the 7.5 percent deduction floor) when they use the funds to pay for medical insurance premiums. In both cases, however, the withdrawals are still subject to normal income taxation. You must start taking distributions from your IRA no later than April 1 following the calendar year in which you reach age 70 and a half. That means if you turn age 70 and a half this year, you have until April 1, 1998 to start withdrawing from your IRA. Failing to make the minimum withdrawal can be costly: You can expect to pay a penalty equal to 50 percent of the amount that should have been withdrawn. Taxpayers should not be misled by the provision in the 1996 tax law that now allows most participants who work past 70 and a half to delay taking distributions from their pensions and 401(k) plans until they actually retire. This provision does not apply to IRAs. Holders of IRAs are required to begin taking distributions under the above-mentioned rule regardless of whether or not they are still employed. There are several methods you can use to calculate your annual minimum required withdrawal. You can base your withdrawal schedule on your life expectancy, on the joint life expectancies of you and your spouse, or on the joint life expectancies of you and another beneficiary. The joint life expectancies rule allows you to base your minimum withdrawal on the longer life expectancy of you and your beneficiary. In effect, this method reduces the amount you must withdraw each year and lengthens your payout period. The amount you need to withdraw is calculated using IRS life expectancy tables and is based on the total value of all of your IRAs. As long as you take your required distribution, it doesn’t matter whether you withdraw it all from one IRA or spread the withdrawal over several accounts. Individuals with large IRAs need to be concerned about a penalty that applies when distributions from IRAs, pensions and/or 401(k) plans exceed an annual withdrawal limit. When you receive funds from your IRAs, pensions and 401(k) plans totaling more than that limit, which is $160,000 for 1997, the IRS normally assesses a 15-percent excise tax on the excess withdrawals. However, a provision in the 1996 tax law provides a temporary break. Between Jan. 1, 1997 and Dec. 31, 1999, the 15-percent excise tax is repealed. During this three-year moratorium, individuals with large amounts in their IRAs may want to take out sufficient amounts to avoid or minimize the penalty for excess distribution in future years. Keep in mind that the law repeals only the 15-percent excise tax; income taxes on distributions still apply. In addition to those changes affecting IRA withdrawals and distributions, starting in 1997 the new law permits IRA contributions of up to $2,000 for an individual and $2,000 for a non-working spouse instead of a combined contribution of $2,250. Age, earnings, deductibility and other requirements for IRA contributions still apply. Is early retirement for you? An early retirement package can be a great opportunity to launch a new business or start a new career. But accepting one may also be a big mistake if you’re not successful in finding employment and don’t have enough assets to fund your retirement. So before you accept an early retirement package, ask yourself the following questions: How close are you to retirement? Timing is important. With an early retirement package offered 10 or 15 years before you planned to retire, you may have to consider finding another job or undertaking a new business venture. Before you decide to take the money, make an honest assessment of your current financial position. If you don’t oblige, is there a layoff lurking around the corner? Next, realistically look at your employment prospects. Have you kept up with the technology and trends in your field? Is your industry hiring or downsizing? How will early retirement affect your ultimate retirement benefits? Generally, you are fully vested in your company’s retirement plan after a maximum of seven years and in many companies, after three to five years. However, the early retirement benefits you receive will be based on a formula that takes into account the number of years you worked for the company and your salary in your last few years of employment. Normally, leaving the work force early would mean sacrificing some pension benefits. But to sweeten the deal, many employers are willing to add years, typically between two and five, to your age or length of service or both when computing your defined benefit pension. In any case, be sure to compare what you’re being offered with what you would be entitled to if you continued to work. Can you truly afford to retire early? As a general rule, you will need between 70 and 80 percent of your pre-retirement salary to maintain your standard of living during your retirement. To get a amore accurate estimate, you’ll have to do some number crunching. Begin by carefully estimating your post-employment income and expenses. Add up your income sources, including Social Security, your company pension , and the value of any personal savings you have set aside for retirement. Then give some thought to the type of retirement you envision and how much it’s likely to cost. Mel Poteshman is a certified public accountant and president of Poteshman Consulting International & Co., a West Los Angeles-based business consulting firm.