Ask the IRA Expert

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Question: I rolled over a personal IRA into my 457K Deferred Compensation Plan at my place of employment. The rollover was transferred from my personal IRA to my 457K within a week.  The IRS is now asking for taxes due to what they call an early distribution of my personal IRA.  My accountant apparently did not explain that on my tax form.  The fund I had my personal IRA with reported that I had an early distribution to the IRS.

Ralph V., Kearney, NJ

IRA Expert: Whenever money is transferred from an IRA at one financial institution to a like-titled IRA at another financial institution via a trustee to trustee transfer, it is not reported to the IRS.  When an IRA is rolled over into a different type of retirement plan such as a 401k or 457 plan, it is reported as a taxable distribution.  In that case, it must be reported on your tax return so the IRS knows that the money was in fact rolled over to a qualified plan.  If your accountant did not report it on your tax form, it was probably because you didn't tell him about the rollover.  While I am not a tax advisor, he should be able to amend your return or contact the IRS and straighten out the situation.  If the money was in fact transferred into a qualified plan, you should have the paperwork to verify that to the IRS.

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Question: Are distributions that are taken by a non-spouse beneficiary of an IRA reported by the financial institution as a "death" distribution or as a "normal" distribution?

Mary B., Colchester, IL

IRA Expert: Distributions to a beneficiary should be reported as death distributions.  Death distributions are exempt from the 10% early penalty, normal distributions are subject to the penalty.

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Question: If you live in a community property state, are IRA's and 401K's part of community property. What about funds that were in an IRA or a 401K prior to marriage? 

Herb, Location Unknown  

IRA Expert: Yes, IRAs and 401(k)s are considered community property.  State laws differ on whether funds that were there prior to marriage are considered community property.

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Question: My husband is 77 and withdraws annually from his IRA.  We report it on our joint filed income tax annually.   I am 69 years old and still working.  Someone said that we should not have to pay taxes on the withdrawal and that we can gift the money to our children.  We pay quite a bit of federal tax each year and any savings would help.  Thanks for your advice.

Ann P., Corona, NY

IRA Expert: Unless that "someone" was your CPA or estate planning attorney, I would be skeptical of that advice. You can gift money to your children from non-IRA funds, but that does not reduce your taxes.  If done properly, that will reduce your estate and pass money to your children (and anyone else) without gift tax consequences.  As far as your husband's IRA goes, I am not aware of any way for you to get around having to pay taxes on his required annual distributions. 

It sounds to me as though you could benefit from working with a good estate planning attorney and CPA.  In regard to your husband's IRA, I can show you ways to incorporate his IRA into your estate planning that will minimize income and estate taxes and build multigenerational wealth for your children and grandchildren. 

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Question: At age 70 and one half, what is formula for determining how much I have to take out of my IRA?  Thanks.

Donald R., Maitland, FL

IRA Expert: The formula for calculating your required minimum distribution is to divide the combined balance of your company plans and IRAs (not including Roth IRAs) on December 31 of the year prior to your distribution by your life expectancy.  You can refer to the Uniform Lifetime Table in the IRA Center on our web site to obtain your life expectancy (which is based on your current age).  If you are married and your spouse is more than ten years younger, you would use the Joint Life Table.  There is also a financial calculator in the Retirement Center on our web site that you can use to calculate your required minimum distribution.   Because there are additional requirements that may or may not apply to your individual situation, I recommend consulting with your CPA, account custodian(s) and financial advisor to be sure that you make the calculation and take the distribution correctly.

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Question: What penalties apply if I liquidate my 401K before 59 1/2 or if I only withdraw a portion? Can you only withdraw a portion because of a medical retirement?

Julie R., Lake City, FL

IRA Expert: You would not be subject to the 10% IRS early withdrawal penalty if you are disabled.  The tax code defines “disabled” as “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of a long-continued and indefinite duration.”  The IRS requires you to prove your disability with a physical or psychological assessment by a doctor.  If you can not meet the IRS definition of “disabled,” your early withdrawals would be subject to taxes and a 10% penalty on the amount withdrawn. 

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Question: Can I roll my 401K from previous employer over to a Roth IRA with no penalties?

Susan, Location and last name unknown

IRA Expert: You cannot roll a 401k directly into a Roth IRA.  In order to move the funds from a 401k into a Roth IRA, you would first need to roll the assets from your 401k into a rollover IRA.  Then, you would be able to do a Roth IRA conversion.  This entails liquidating the IRA, paying the taxes and moving the funds into a Roth IRA.  Roth IRA conversions are not subject to early withdrawal penalties.  However, you would have to be eligible to make the conversion.  In order to do a Roth IRA conversion, your modified adjusted gross income (MAGI) must be less than $100,000 and you cannot be married and filing separately unless you do not live with your spouse.

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Question: Is it true that I can invest my IRA funds in real property as long as I (or any member of my family) do not reside in it?  If so, am I then required to return those original funds, and all gains (rent, sale)back to the IRA account, or do I just pay taxes on the gains as ordinary income?

Carol W., Newport Beach, CA

IRA Expert: It is true that you can invest IRA funds in real property as long as it is investment real estate.  In addition to the fact that rental income and sale proceeds must be paid to the IRA account, there are numerous other complex IRS rules and restrictions.  It must be a cash transaction.  You cannot loan money to the IRA and the IRA cannot be used to guarantee a loan.  All property costs must be paid from IRA funds.  Those are just a few things to consider.  If you are subject or will soon be subject to RMDs, that opens up another can of worms.  One small mistake could invalidate your entire IRA, not just the portion invested in real property.  Be careful. 

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Question: When can you open a Roth IRA for a child?  What type of income does the child need to show?  Does it have to be wages on a W-2?  Thank you.

Kevin W., Massapequa, NY

IRA Expert: You can open an IRA for a child at any age as long as he or she has earned income.  Any legitimate job for which they are paid a reasonable wage will qualify.  You will need to keep records of the hours worked, jobs performed and wages paid.  While not all employers will issue a W-2, most advisors recommend that you file a W-2 for your child to avoid potential problems.  You may contribute up to $4,000 or the total amount of their income, whichever is less, to a Roth IRA.

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Question: Can a person have more than 1 IRA account?

Beth W., Location Unknown

IRA Expert: Yes.  You can have one hundred.  In most cases, one should suffice.

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Question: I turned 70 in April, 2005.  Do I have to begin taking money from my IRA in October, or can I calculate from the tax year?  Also, how much do I have to take out?  If my husband has liquidated IRA funds this year, does that exempt me if we pay taxes jointly?

Elizabeth L., Location Unknown

IRA Expert: Your Required Beginning Date (the date by when you must begin taking distributions from your IRA) is April 1 in the year following when you turn 70½.  So if you turn 70½ in October 2005, you must begin taking distributions by April 1, 2006.  But that is only for your first year’s (2005) distribution. You must take your 2006 distribution by December 31, 2006.  The amount of your required minimum distribution ( RMD) is based on the total balance of your IRA(s) on December 31 in the year prior to when you take your first distribution.  If you take your first distribution this year, it will be based on your IRA balance on December 31, 2004.  If you wait until April 1, 2006, it will be based on your IRA balance at the end of this year.  You will find RMD tables and financial calculators on our web site at www.winerwealth.com that can help you calculate your RMD.  Your CPA and IRA custodian should also be able to assist you. 

Your husband’s having to take distributions from his IRA has nothing to do with your also having to take required minimum distributions.  If both you and your husband are over 70½, you must each take RMDs from your respective IRAs each year.

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Question: Are there any benefits in rolling my IRA into my 401K?  My 401K is doing very good, while my IRA seems to be losing money.

Mary M., Location Unknown

IRA Expert: While you could roll your IRA into your 401k, you should generally have more control over your account and a wider selection of investments in an IRA.  I would suggest that you examine the reason(s) why the investments in your IRA have not been performing as well as those in your 401k.  Perhaps they are allocated more aggressively or more conservatively.  It may also be that you selected bad investments in your IRA or do not have a good selection of high quality investments from which to choose.  If that’s the case, you could transfer your IRA to another IRA custodian that can provide you with a better selection of investments.  TD Ameritrade, Schwab and Fidelity all provide a wide selection of high quality investments for IRAs and non-retirement accounts.  It sounds to me like you could benefit from working with a professional financial advisor who could help you select an appropriate IRA custodian and appropriate investments for your retirement accounts.

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Question: I will be 70 1/2 next year. I have an IRA and also a 401K with the company I work for.  I am still working full time and plan on doing so as long as my health permits and the company stays in business. Am I required to take the distributions at 70 1/2 if I am still working full time?

Paul M., Lafayette, LA

IRA Expert: As long as you are working and do not own more than a five percent interest in your company, you can delay your RMD from your company retirement plan until April 1 in the year following your retirement.  However, you must still begin taking required minimum distributions from your IRA when you turn 70½.      

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Question: In 2001, we mistakenly filed away a cashier's check that was issued by our bank to rollover a personal IRA account into a 401k.   We discovered our error in 2005 and obviously the check was never deposited.   I understand that there is a 60-day rollover rule to avoid penalties and tax consequences once the check had been issued.  Can you tell me what consequences I can expect to face after four years?

Brad P., Location Unknown

IRA Expert:  As a result of your oversight you would normally be subject to the original amount of the taxes due, a 10% early withdrawal penalty and additional penalties and fees for not making the tax payment back in 2001.  However, the IRS has been known to forgive certain mistakes and oversights.  You could apply for a private letter ruling, however, that is not a quick or inexpensive process.  In some cases, the cost of applying for a private letter ruling including legal, professional and IRS fees can run as much as $15,000.  Depending on the amount of the check you neglected to roll over and the amount of the tax and penalties due, it may be cheaper and easier just to pay the piper.  

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Question: I have recently purchased my first home.  I have had a ROTH IRA for over 5 years.  I already put forward my down pmt and paid all closing costs.  Can I withdraw from my ROTH IRA to compensate the cash I put down?  Or is it now too late?  Can I use IRA distributions for monthly mortgage payments?  Thanks.

Kevin B., Location Unknown

IRA Expert: Because you have owned a Roth IRA for more than five years, you would be eligible to withdraw funds under the first-time homebuyer exception.  However, I'm not sure whether or not you can reimburse yourself for funds already paid.  As I cannot provide tax advice, I suggest you consult with your tax advisor and possibly the IRS for further clarification of the rules before you do anything.  In regard to using distributions from your Roth IRA for mortgage payments, you can withdraw principal up to the amount of your total contributions at any time tax and penalty free for any purpose.  However, I do not believe that you would withdraw the growth until after age 59 1/2 for the purpose of making monthly mortgage payments. 

I generally advise clients not to take money from their IRAs for anything other than a dire emergency.  IRAs are for retirement, and taking money from your retirement savings to pay your monthly mortgage or buy a first home could jeopardize your quality of life and financial security in retirement.  

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Question: For my withdrawal this year, wouldn't I be ahead to transfer dividend paying stocks to my personal account, thereby just paying 15% taxes instead of 30% later on?

Robert C., Location Unknown

IRA Expert: While you can take an "in-kind" distribution from your IRA, you would still have to pay an ordinary income tax on the market value of the security.  Taking an in-kind stock distribution would not lower the tax on your IRA distribution.  Over time, there may be advantages or disadvantages.  You would have to run the numbers.  I suggest that you consult with your tax advisor before you do anything.  

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Question: I would like info on carrying real estate in my IRA.

Janice C., Location Unknown

IRA Expert: Most IRA experts advise against buying real estate in an IRA.  The tax laws are extremely complex and there are many IRS prohibited transactions.  If you make a mistake, the IRS could potentially disallow you entire IRA.  Here is a small sample of the issues you must consider. 

1) It must be investment real estate.  If you plan to live in it or take vacations, that will not fly.

2) It must be a cash transaction.  Any cash used for all home-related expenses must come from within the IRA.

3) You cannot loan money to your IRA to buy property or guarantee a loan by your IRA.

4) If you are subject to required distributions, you would need a formal appraisal each year to calculate the value on which your RMD would be based. 

5) If someone inherits the property within the IRA, there may be required minimum distribution issues that require the property to be sold.   

6) The property would not receive a step-up in basis at death and would be subject to ordinary income taxes if distributed in-kind at death.

If I have not scared you away from investing in real estate within your IRA, check out www.entrustadmin.com.  They are one of the few IRA custodians that specialize in alternative investments such as real estate. 

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Question: I have an IRA with Merrill Lynch and they are charging me $100 a year to maintain it.  It's just a small account worth about $6,000.  I don't want to close the account or withdraw the funds because of the penalties.  Can I just transfer the account to another company without losing anything?  Is that what is called a rollover?

Christy C., Tallahassee, FL

IRA Expert: Yes.  You can transfer the account to any other brokerage firm without IRS fees and penalties.  Merrill Lynch may charge you a fee to close and transfer your account.  That is pretty normal these days.  $100 seems pretty high.  You should be able to find a brokerage firm that does not charge an IRA custodial fee or charges less than $100.  You might try TD Ameritrade or Fidelity.  Technically, a "rollover" is when the brokerage firm sends you a check for the IRA proceeds and you then deposit the check with another institution.  This must be done within 60 days.  The best, safest way to transfer your account it to open an IRA at another financial institution and complete paperwork to enable a direct trustee to trustee (institution to institution) transfer. 

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Question: I am 59 1/2 and wish to start withdrawing from my traditional IRA.  Is there a limit to the amount of funds that I can withdraw in a year?  Aside from the tax consequences, could I withdraw the entire amount in one year?

Joan K., Location Unknown

IRA Expert: There is no limit to the amount you can withdraw from your IRA in a given year.  If you wish, you could liquidate the entire IRA at any time.  Whether or not that would be a wise decision is something you need to consider and discuss with your tax and financial advisors.  Depending on the size of your IRA, liquidating the entire amount in one year could potentially bump you up into a higher tax bracket and increase your overall tax burden. The IRS would love that. 

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Question: I am 62 years old and my 23 year old daughter has decided to get a master's degree.  Can I take money out of my traditional IRA for education without having to pay taxes on the money? 

Sally K., Gainesville, FL

IRA Expert: IRA owners are allowed to take early withdrawals from their traditional IRAs for qualified educational expenses (subject to specific guidelines) penalty-free... but not tax-free!  Since you are over age 59 1/2, you can already take distributions from your IRA at any time and for any reason.  But you would have to pay the taxes on any distributions. 

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Question: My friend's mom just passed leaving four separate IRA accounts.  The deceased's husband is beneficiary on all four accounts.  Can they all be rolled under one IRA account for him?

Curt O., Winston-Salem, NC

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Question: My child will be the beneficiary of my IRA upon my death.  I thought she could simply roll it over into her own IRA but now I am hearing that it is considered to be taxable income to her and NOT an inheritance. Can you tell me what exactly happens to an IRA when it is inherited by an adult child?

Barbara K., North Port, FL

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Question: How do I roll over my 401k to an IRA without incurring a penalty?  What is the best way to go?  My work place has been sold.

Thomas P., Crothersville, IN

Question: Can you have both a ROTH IRA and a Traditional IRA?  Does it make sense for a person who is near retirement age to even open a ROTH?

P. Frank, Location Unknown

IRA Expert: You can have a Traditional IRA and a Roth IRA.  However, you can only contribute the maximum allowed by the IRS to both.  For example, the maximum contribution in 2005 is $4,000. Individuals age 50 and over can contribute an additional $500.  You could split the $4,000 contribution between a Roth IRA and a Traditional IRA.  You would receive a tax deduction for your Traditional IRA contribution but not for your contribution to the Roth IRA.   If you have a company retirement plan, you could make a full contribution to a Roth IRA.

Does it make sense for a person who is near retirement to open a Roth IRA?  In most cases... YES!!!  For those who qualify, the Roth IRA is one of the best, most underutilized savings and estate planning vehicles.  You should consult with your CPA and financial advisor to determine what's best for your individual situation.  If you would like to discuss your situation with me, I would be happy to provide you with a free telephone consultation.

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