F.I.T.T of the Month
(Financial Information & Tax Tips)

September, 2014
 What Did He/She Say?

"I'm not saying we will win the day but the day we have to win might not be the day next year but it might be in a few years' time when we will have structure here that can be satisfactorily devolved to us."

-Business minister of Wales Edwina Hart
As a general rule, taking money out of a retirement plan type account (for instance IRA, profit-sharing, pension plan, 401(k), etc.) before age 59 will subject you not only to paying income tax thereon, but will also cause you to incur a 10% early withdrawal penalty. There are limited ways around that - generally (and very limitedly) dealing with things like medical expenses. However, there is one general approach that has nothing to do with hardships or require anything in particular, that allows you to take out money from a retirement plan system without penalty, regardless of your age.  The "trick" is that the money must be withdrawn in an annuity-like process. That means you need to take the money out in relatively constant amounts for a long period of time. By way of example, if you have one million dollars in an IRA and you are age 50, you can start taking the money out of that IRA now at age 50 and only have to pay income tax on that as income, you avoid a penalty - if you do so by taking the money out as if it were an annuity. For simplicity, let's assume that your life expectancy is 30 years, and let's for the moment ignore any return on investment. If we divide the one million dollars by 30 years, we get $33,000 a year. Thus, if at age 50 you started withdrawing at the rate of $33,000 per year, and continued to do so, that money would be able to be taken without penalty.

As a general rule, dividing up property between spouses (when married or going through a divorce - it simply doesn't matter when it's between spouses) is a non-tax event - it is not even a reportable event. Thus, between husband and wife, and very importantly between divorcing husbands and wives, there are no immediate tax consequences of for instance, moving a $100,000 stock position form one spouse to the other; or a piece of real estate; or buying out a spouse's interest in a business. These events all happen without any immediate tax consequence. That's not to say there are no tax consequences - only that they are not immediate. So, if as part of a divorce action a wife transfers to her husband stock having a value of $100,000 but with a cost of $70,000, the wife does not incur a gain of $30,000 (the "sale" at $100,000 for something that cost $70,000). The husband picks up that $100,000 worth of stock at a $70,000 cost - he steps into the shoes of his (ex) wife. If the ex-husband were to turn around the next day sell that stock for the $100,000 it's worth, he would experience an immediate $30,000 gain (short term or long term depending on when the stock was purchased by his wife).


Another example, and one which I have seen rankle a number of people, is let's assume for the moment that the marital home is going to be kept by the husband, and that as part of the divorce, since there is $200,000 of equity in the house, the husband has to buy out the wife's $100,000 share. Assume for the moment the way that he does that is by mortgaging the house for $100,000, takes that $100,000 and hands it to the wife. He now owns the house outright, and the wife has her share of the house in cash. From a tax point of view, that $100,000 mortgage, which the (ex) husband took out and then disbursed that money, represents absolutely nothing. If that house had originally cost say $300,000 to the couple some years ago (and let's ignore any possible improvements, etc.), it still cost $300,000. The fact that the husband spent an extra $100,000 to buy out his (ex) wife, is irrelevant, a non-tax event

The Financial Information & Tax Tips are intended for general information and to provide ideas. They are presented in an abbreviated format. They are not tax advice, which can only be given on a one-on-one basis inasmuch as taxes are very complex and each situation is unique. If you believe that any tax tip is relevant to your situation, we urge that you consult with a tax professional.

Kal Barson

About Kal 

The Barson Group
60 East Main Street
PO Box 8018
Somerville, NJ 08876
Phone: (908) 203-9800
Fax: (908) 203-9399