Tax-free IRA withdrawals
|
|
February 8, 2000: 3:45 p.m. ET
Expert advises on how to dip into your IRA account -- without the tax penalty
|
NEW YORK CNNfn) - Withdrawals from a retirement account are tax free if the funds are returned to your IRA account within a specific period.
In response to a reader's question, Scott Kahan, a certified financial planner from New York and a member of the Financial Planning Association, outlines the exception and the penalty if you miss the deadline.
Ask the expert a question about your retirement plan.
Q: I took an early distribution ($13,000) from my IRA on Dec. 15, 1999. I have not taken any other distribution within the last 12 months (even 24 months). My understanding is that if I put the $13,000 back into my IRA within 60 days of Dec. 15, 1999, this would be a non-taxable event and I would not have to report the income from the distribution and would not owe a $1,300 penalty. Is this a correct assumption? Secondly, if I fail to put the money back within 60 days are the tax and penalty due for tax year 1999 or tax year 2000?
A: You are right. The withdrawal would generate a 1099R for the year withdrawn, 1999, showing taxable income. Assuming that you replace the money within the 60-day period, you would report the distribution on your 1999 tax return, but show it as also being rolled over and thus not taxable.
Even if you report the transaction properly, it is possible that the IRS may question why the income was not reported. If that happens, you will need to send the IRS proof that the money was replaced. So save your records because the IRS has three years from the filing date to audit or question a tax return. Some accountants suggest that you enclose the proof when filing your tax return.
If you can't replace the money, it would be taxable and subject to a 10 percent penalty if you are under age 59-½. You may also be subject to state income taxes depending upon where you live.
If you can't replace the full amount, replace what you can. It is not an all-or-nothing transaction and you would only owe tax and penalties on the amount not replaced.
However, be careful with the dates. The 60-day period begins when you receive the money. Sixty days from Dec. 15 is Feb. 12. Many people assume 60 days would be Feb. 15. Count out the dates very carefully or else they could turn out to be very expensive days.
--compiled by Antoinette Coulton
|
|
|
|
|
|