How to make sure that the IRA distribution / withdrawal from your IRA won’t be taxed when you roll it over to a new IRA with 60 days

Moving money between two IRA accounts can sometimes be a tricky endeavor, and it is critical that you understand your transfer options to make sure that you don’t cause yourself any unnecessary taxes on whatever it is that you are trying to do.

For most individuals, moving money from one IRA custodian to another IRA custodian occurs when they are switching advisors  or money managers. You might have an IRA at Fidelity, but want to move your account to an IRA at Vanguard, and this process is completed by what is know as a “trustee to trustee” transfer.

The paperwork process to complete this transaction is fairly simple:

  1. Open a new IRA account at the brokerage firm / custodian of your choice
  2. Fill out the Trustee to Trustee IRA transfer paperwork
  3. Your new IRA firm will then submit your signed request to your old IRA company, and your IRA assets will then be transferred over tax free.

For example: 

You have an IRA at Fidelity, and you want to open up a new account with Anthony Capital to take advantage of their FBIAS™ Fact Based Investment Allocation Strategy portfolios that are risk managed. You would open up a new IRA account at the custodian that we use, Interactive Brokers by clicking on THIS LINK, and then request to transfer the account positions over via the Trustee to Trustee transfer process.. Viola! Piece of Cake!

What if you have cashed out your IRA? How do you put the money back in to an IRA and not pay taxes on it?

If you’ve withdrawn monies from your IRA, you have 60 days to put the monies back in another IRA before it will be deemed as Ordinary Income on your 1040 tax return and you’ll be liable for the taxes. To prevent that from happening you’ll need to do the following:

  1. Report the amount of distribution on line 15(a) of Form 1040 as a non taxable distribution.

1040-screen-shot

Because you cashed in your IRA, your old broker/custodian will send you a 1099 form for that tax year and will report this distribution as ordinary income to the IRS. You want to fill out line 15a on your 1040 form to acknowledge that you did take a distribution, but it should not be taxable because you have deposited the monies into a new IRA with in 60 days. As long as you redeposit the entire amount, within 60 days, it won’t be taxable–hooray!

For example–If you took out $100,000 from your IRA, then you’d list $100,000 on Line 15a.

2. Write ROLLOVER next to line 15b to indicate to the IRS that you transferred the money to a new IRA account. You want to make it easy for them to know that you did not spend the money!

3. Make sure that your new IRA custodian reports this $100,000 IRA on the IRS Form 5498

When you deposit money into your new IRA, make sure to tell them the money is coming from another IRA account and that you are doing it within the 60 day rollover window. Your new IRA company will send you and the IRS, Form 5498, IRA Contribution Information, which resembles the Form W-2 that businesses use to report wages to the IRS. The form is used to not only report IRA contributions to the IRS (box 1), but also IRA rollover contributions (box 2) that satisfy the 60 day rollover rule.

form-5498This form is required to be sent to you by May 31st following the year that the contribution was made. Since your tax return form is due April 15th, it is not meant to help you report your contribution/60 day rollover, since the information you provided on your Form 1040 line 15a would have done this, rather it is used to help the IRS make sure that the amount of IRA deductions on the IRA owners’ tax returns matches the trustee reports.

You don’t need to do anything with the form itself, meaning you don’t attach it and send it in with your tax return, but you should keep it for your records and make sure that your new IRA custodian sends it to the IRS.

Hope that helps! Now that you have your money inside of your IRA, you should look at some proactive money management strategies to invest your money, like FBIAS™ Fact Based Investment Allocation Strategies. These is a risk-managed investment process that seeks to profit in bull markets and protect profits in bear markets.

If you have any questions, please reach out to an Anthony Capital, LLC advisor today!

Success!

Dave Anthony, CFP®, RMA®

 

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