IRA Withdrawal and Re-Deposit Within The Year
Client withdrew money from IRA to help child on April 15, 2009. They just told me and asked if they re-deposit this money in 2009 with there be any tax ramification?
Client withdrew money from IRA to help child on April 15, 2009. They just told me and asked if they re-deposit this money in 2009 with there be any tax ramification?
Permalink Submitted by Alan Spross on Thu, 2009-05-14 17:53
If they complete an allowable rollover within 60 days of receipt, it can be reported as a tax free rollover on line 15 of Form 1040. The 60 day period ends on June 14th, 2009, which is the last day the funds can be rolled back into the IRA or into a new IRA account. However, note that there is also a one rollover limit per IRA account per 12 month running period. Therefore, the client cannot have either done a rollover from this same IRA and this IRA cannot have received a rollover from another IRA after 4/15/2008 or they have used up the one permitted rollover. Likewise, if this rollover is permitted and the funds are rolled back by 6/14, the client cannot take another distribution that is rolled over until 4/16/2010.
Permalink Submitted by [email protected] on Wed, 2009-06-03 02:24
As usual, Alan is spot on. However, I thought it relevant to add one point, given that you are still within the 60-day window. If you find that the client already did a rollover within the last year as Alan described, and therefore, is not ineligible for another rollover now, there are a few ways to get around that problem. The once per year rule only applies to rollovers from IRA to IRA or from Roth IRA to Roth IRA. As such, here are two “easy” ways to get around the problem (provided they are done within the 60-day window):
1) Roll the money into a Roth IRA account. If the client is not eligible for conversion or does not want to keep the Roth IRA, you can always recharacterize back to a Traditional IRA. This does not violate the once per year rule.
2) If the client has a qualified plan (and it accepts rollovers) he can roll the funds over there. Again, this would not violate the once per year rule.
Permalink Submitted by Alan Spross on Wed, 2009-06-03 03:44
Jeff,
I am not so sure about the second exception. While a rollover FROM an employer plan to an IRA does not count toward the one rollover limit, the reverse of that would be a distribution FROM the IRA. The following is copied from Sec 408, and appears to include a rollover FROM an IRA to another plan as one that would be countable toward the one rollover rule. As usual, if this was done by direct rollover (G coded 1099R), it would not count.
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(B) Limitation
This paragraph does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.
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Permalink Submitted by [email protected] on Wed, 2009-06-03 05:54
Alan,
The section of code you cited – Sec. 408(d)(3)(B) – references Sec. 408(d)(3)(A)(i), the subparagraph which covers IRA. Qualified Plans though are covered by the next subparagraph 408(d)(3)(A)(ii), of which there is no mention. Therefore, the 2nd distribution from the IRA, if rolled to an elegible plan, should not violate the once-per-year rule. I actually was more restrictive than need be, since I said a qualified plan. It could also be rolled to a gov’t 457(b) or 403(b) without violating the once-per-year rule. I have included the section cite below for convenience.
In general. Paragraph (1) does not apply to any amount paid or distributed out of an individual retirement account or individual retirement annuity to the individual for whose benefit the account or annuity is maintained if—
408(d)(3)(A)(i) the entire amount received (including money and any other property) is paid into an individual retirement account or individual retirement annuity (other than an endowment contract) for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution; or
408(d)(3)(A)(ii) the entire amount received (including money and any other property) is paid into an eligible retirement plan for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received, except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross income (determined without regard to this paragraph ).
Permalink Submitted by Alan Spross on Wed, 2009-06-03 23:45
Agree. Indirect rollovers to a QRP are not limited. If there is basis in the IRA, the amount rolled to the QRP would be considered pre tax, and no basis would be considered distributed from the IRA unless the pre tax amount had been exhausted. To this extent, it appears that the edition of the code we have been citing has not yet been updated for those changes, which occurred in 2002.