Rule Relaxed on IRA Withdrawals

QUESTION: I think I heard or read that there is some way under the new tax law for people who haven’t yet turned 59 1/2 and aren’t disabled to withdraw money from their IRA without a penalty. The stock market has been good to me and my IRA over the past couple of years, and I would like to put some of those profits to other uses. But if I’m going to be penalized, I won’t touch the money.--F. H.

ANSWER: In rewriting the tax laws last year, lawmakers toughened most of the rules for tax-deferred retirement savings. But you’re right that they did relax one of the withdrawal provisions.

This is no panacea for savings-rich, cash-poor consumers, however. As rewritten, the law waives all early withdrawal penalties if the IRA holder agrees to withdraw the funds very gradually--over his or her lifetime.

In other words, the payments must be prorated, like an annuity. In fact, to take advantage of the relaxed withdrawal rules, you must use the Internal Revenue Service’s annuity tables to craft a payment schedule.

Thus, for savers more than a handful of years away from age 59 1/2--the age when taxpayers may begin penalty-free withdrawals from their tax-deferred IRA accounts in whatever amounts they wish--this new rule is no great financial aid.

It is a far better deal for those who are age 54 1/2 or older. That’s because the new law permits taxpayers to discontinue this annuity-like withdrawal schedule after five years, provided that the taxpayer has by then reached age 59 1/2.

Hence, you could gradually withdraw a small part of your IRA funds for five years without fear of being charged the 10% penalty for early withdrawal and then, having reached 59 1/2, withdraw the remainder however you choose.

Q: My son paid for his college education with the help of a student loan--something that I seem to appreciate more than he does. He says none of his friends are repaying their loans and that he doesn’t plan to, either. The only prayer I have of winning this battle with him is to prove that the government can somehow retaliate. Can you help?--N. P.

A: Assuming that your son is a taxpayer, the government does have a way to collect his loan money.

In each of the past two years, Congress has authorized the IRS to withhold income tax refunds as a last resort from student borrowers who renege on their loan repayments.

Legislation is pending before Congress now that would make this authority permanent.

Here’s how it works: Once the government has exhausted its efforts to collect overdue student loan payments, the Department of Education is required to contact the defaulter one last time.

The borrower then has 60 days to start or resume payments. Failing that, the borrower’s name is turned over to the IRS, and any tax refund due him or her is reduced by the amount of the loan balance.

Q: I was listening to a financial adviser on a radio program the other day, and in his comments he kept talking about something called “boot.” If he ever explained what that means, I missed it. Do you know?--L. A.

A: In financial and tax circles, the term “boot” usually refers to the sweetener in a property exchange. It’s an outgrowth of an old usage meaning “in addition” and is best illustrated by the phrase “to boot”--as in “I bought six doughnuts and got a free one to boot.”

Say that you’ve decided to go into business for yourself, and you’ve become frustrated trying to sell your condominium unit to raise the funds to buy commercial space in a shopping mall. You might instead choose to swap the property you have for the property you want in a tax-free exchange.

If to swing the deal you have to throw in some other property besides your condominium, you have added “boot” to the transaction. The “boot” is taxable.