Rules to Avoid Withdrawal Penalty

Q: I will be forced to liquidate my pension and profit-sharing plan prematurely at age 49. I understand that in addition to paying taxes on my withdrawal I will owe a penalty. Is there any way to avoid it?

--A.A.

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A: Although you didn’t say so, we’re assuming that you are self-employed and have a type of Keogh or similar retirement plan.

If this is the case, you should first terminate your plan and then transfer its assets to a rollover individual retirement account. Now you will be covered by the Internal Revenue Service rules governing premature IRA distributions. Failure to terminate your plan could jeopardize its standing as a tax-deferred trust account and subject you to onerous IRS penalties. You would be wise to consult the tax or legal professional who helped you establish your plan as you prepare to terminate it.

Able-bodied taxpayers under age 59 1/2 may withdraw finds from their IRAs without penalty if the disbursements are made under one of three “substantially equal” annuity-type formulas approved by the IRS. Taxpayers taking early withdrawals must take the disbursements, at the rate determined by the formula of their choosing, for either five years or until reaching age 59 1/2, whichever occurs later. The withdrawal formula cannot change until the minimum period has been completed. For more information about the three formulas, see IRS Publications 939 and 590. Call (800) 829-3676 to order.

If you are instead enrolled in a 401(k) plan, you may transfer your account to an IRA upon termination of employment or upon reaching the “normal retirement age” specified in that plan. (Sometimes this is under 59 1/2.) In that event, you can begin taking annuitized IRA distributions under the rules described above without paying early-withdrawal penalties.

Reducing Property Tax Assessment

Q: Can you tell me whether there is a drawback in trying to get one’s property tax assessment reduced? I think my house has dropped in value.

--C.L.

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A: The only problem posed by your plan would occur if you were planning to sell your home any time in the near future at a price above what you would want the assessor to revalue your home. (But you’d have to be pretty dim to try this; most buyers today know how much property values have fallen recently.)

There’s little reason for you to be paying more in property taxes than you should, no matter how long you plan to own your home. But you should know that the critical issue in getting your local assessor to lower your assessment (and by extension your property tax bill) is to demonstrate that the assessment is greater than the home is worth on the open market. Remember, it’s not enough to show that your home’s value has declined; you must prove that its fair market value--or likely sales price--is less than the value placed on it by the assessor.

The challenge process varies from county to county, but your first step should be to contact your county assessor’s office and inquire about filing an appeal with the local assessment appeals board. By statute, appeals can be filed only until Sept. 15.

One final point: There are any number of enterprising operators who may try to convince you that you need their help in mounting a successful assessment challenge. It’s not true. Government assessment officials agree that there is virtually no reason for you to give up a sizable chunk of the tax savings you are fighting for in exchange for a service you can easily perform yourself.

All the supporting information you need to prove your case is part of the public record and is available on property transfer and tax files maintained by the county assessor’s and recorder’s offices.

Income Property and Principal Residence

Q: I recently purchased a triplex that is both my principal residence and an income property in the form of the two other units I rent. The property is meant to replace a principal residence I sold. I am wondering how I should apportion the split between my residence and the income property. Is there a formula?

-- A.W.T.

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A: Ideally, your solution would be to get a formal appraisal of the entire property, dividing the value among each of its parts. This would have the effect of assigning a replacement residence value to your home and a value to the income units that you can use for the depreciation of those rentals.

Absent this, you can get a letter from your real estate broker breaking down the value of each portion of the property. If the units are essentially the same, your agent might simply divide the purchase price in thirds. Another method would be to assign value according to square footage. If the units are substantially different, however, you will need professional assistance.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Or send electronic mail to carla.lazzareschi@latimes.com

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Helpful Hints on Treasury Securities, Social Security

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