BUSINESSWEEK ONLINE : OCTOBER 9, 2000 ISSUE
BUSINESSWEEK INVESTOR How Raiding Your IRA Can Pay Off Later Most people break into an IRA or 401(k) to get cash for an emergency. But there's another good reason to drain money from a tax-advantaged retirement account before turning 59 1/2. It can be a great tool for estate planning. If you're going to take money out before the Internal Revenue Service sanctions withdrawals, be sure to use the 72(t) loophole described in the accompanying story. This exempts you from a 10% penalty on early withdrawals. Of course, 72(t) payouts are still subject to ordinary income taxes. But since estate-tax rates are generally higher than income-tax rates--they range from 37% to 55%, vs. 15% to 39.6% for the highest earners--you might come out ahead by paying Uncle Sam now rather than later. PROTECTING HEIRS. Don't worry about estate planning if your net worth is below $675,000. That is the amount each person is entitled to shield from estate taxes in 2000 and 2001. Moreover, it only makes sense to use a 72(t) strategy for estate-planning purposes if most of your wealth is tied up in a retirement account. In that case, 72(t) withdrawals will not only reduce your account balance, they can also lessen or eliminate your exposure to estate taxes. Of course, once you withdraw money from a retirement account, it is still part of your estate until you spend it or give it away. Consider transferring the money to your spouse--provided that he or she has less than $675,000 in assets. That way, both of you can take advantage of the $675,000 each person is entitled to shelter from estate taxes. If you pass money on to heirs, remember to give no more than $10,000 a year to each person. Anything more, and the gifts eat into your $675,000 estate tax exemption. You also can use 72(t) withdrawals to buy life insurance. If purchased through an irrevocable trust, an insurance policy won't be counted among your assets. And when you die, the proceeds can be used to pay your estate taxes, says Ed Slott, a Rockville Centre (N.Y.) tax expert. Sure, it has been drummed into you that taking retirement money early is a no-no. But if you can lower your estate tax bill in the process, your heirs will thank you for breaking the rules. By Anne Tergesen _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Safely Cracking the Nest Egg Early TABLE: Pain-Free Withdrawals How Raiding Your IRA Can Pay Off Later INTERACT E-Mail to Business Week Online

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