Albert E. Potts, bb;

>>Regarding the answer to put it into C.D.'s-- could more clarification be given about that? How, exactly, will putting the proceeds of one's IRA/401(k)into C.D.'s to get around paying estimated tax on the amount?<<

1. In order to defer, (for now, the taxes, NOT estimated taxes, the proceeds of the IRA must NOT be sent to you, but rather must be sent directly to an agent (some financial entity, bank, mutual fund, credit union etc.). This is called a roll over. You can set it up with a bank, or credit union to act as your agent and to put your IRA into their cd's.

Since this is an agent to agent transfer, and the money never passes through your hands there are no taxes due and no penalty is involved.

2. If, regardless of the reason for it, you take pocession of the money, or if the check is made out to you in your name as payee, the entity which currently holds your IRA MUST with hold 20% of the proceeds and send it to the IRS.

This is not optional, it is required. You will receive a check for the 80% (minus any state taxes that your state requires to be with held). You then in turn have 60 days in which to decide to keep the loot or chicken out and deposit it into another IRA.

However, should you decide to chicken out and deposit it into another IRA, you MUST deposit the full TOTAL amount of the cashed out IRA into the new account to avoid having a "partial withdrawal" and all penalties involved when you file your taxes.

This then means that you must pony up the amount(s) with held and paid as taxes even though you never had the money to start with.

3. If at the time that you take pocession of your IRA you are under the age of 59 1/2, and you are NOT disabled, you must pay an additional penalty of 10% when you file your income taxes for the year. This penalty is your responsibility to file/pay and is a part of your annual tax filing paperwork.

There are certain very specific reasons for which you can avoid paying the 10% penalty, which are the exceptions to the rules, but for the most part, if you handle the money you pay if you are under 59 1/2 years of age.

I just went through this little jewel myself. Fortunately(?) I am disabled and I turned 59 1/2 on the very day that I withdrew my 401k, so I escaped the 10% penalty. But, and trust me on this one, I sure as h*ll didn't escape the taxes. Oh boy, did I not escape them.

Oh yeah, I cashed out in 1998. Better to have missed this (so far) minor increase in value than to risk my family's future on a bet that the market would hang in there until now.

Good luck on yours.

S.O.B.

-- sweetolebob (La) (buffgun@hotmail.com), January 07, 1999