Taking Care of Mom and Dad: Defined Contribution Distributions

With the details of organizing defined contribution accounts established, we come to the matter of how the money in those accounts can be taken out.

As we've noted before, a penalty in the form of a 10 percent additional tax generally applies if your parents withdraw or use IRA assets before they are age 59 1/2. These withdrawals are called early distributions.

However, anyone can usually make a tax-free withdrawal of contributions if they do so before the filing date for their tax return for that year. This means that, even if you are under age 59½, the 10 percent additional tax may not apply -- though usual income tax will.

Beyond that, there are several exceptions to the age 59 1/2 rule.

Your parents may not have to pay the 10 percent additional tax if they are in one of the following situations.

• They have unreimbursed medical expenses that are more than 7.5 percent of their adjusted gross income.
• The distributions aren't more than the cost of their medical insurance.
• They are disabled.
• They are receiving distributions in the form of an annuity.
• The distributions are not more than their qualified higher education expenses.
• They use the distributions to buy, build or rebuild a first home (including a first home belonging to a child, grandchild or other family member as described by the IRS).
• The distribution is due to an IRS levy on the qualified plan.

After they reach age 59 1/2, your parents can receive distributions from their defined contribution plans without having to pay the 10 percent additional tax. But they can also leave the money in the accounts, increasing -- everyone hopes -- in value. In fact, as we've noted before, your parents can actually add more money to their IRAs through their late 50s and 60s than any other time. And that's the time to do so, if possible.

If your parents were born before 1936, they may be able to use some serious tax advantages -- technically, things like capital gain credits and averaging treatment -- when it comes to taking distributions out of qualified plans. In order to use these tools most effectively, your parents will probably need to consult a certified public accountant (CPA) who can review their finances in detail.