TaxMamas TaxQuips

Today TaxMama® hears from Jeff in the TaxQuips Forum with a very common type of problem. Let me paraphrase. “My wife had a traditional IRA at Vanguard and we rolled it over to another company where I set up the account. We didn’t notice that the account was in my name, instead of hers until we saw my name on a recent statement. What now?”

Dear Jeff and TaxMama Family,

You can read my answer to Jeff here. But I want to talk to you today about avoiding IRA problems. I hear about so many problems from people rolling over funds from one IRA to another, or from a pension plan or 401k to an IRA. Here are some common mistakes to avoid.

1) When moving money from one account to another, make sure to read the paperwork and to log into the new account to:

1. Make sure that it IS an IRA account.


2. Make sure the account is in the correct name – IRA’s belong to an individual – not a couple.

2) If you withdraw the money instead of making a direct transfer, be SURE to deposit the funds to an IRA before the 60 days runs out. Remember, it’s not two months – it’s 60 days.

 

3) If you plan to draw up to $10,000 to buy a home, you must understand the rules:

1. The money must come from an IRA only – not a 401(k) or other pension plan.


2. So if your money is not in an IRA, move it to one before your withdraw the funds.


3. You are only exempt from the early withdrawal penalties – you must still pay tax on the money you withdraw.


4. Even if you are married, you are only entitled to draw up to $10,000 from your own IRA. If you need more money, you must withdraw the rest from your spouse’s IRA.


5. If your spouse doesn’t have an IRA yet, and you want to save up money for a house, consider funding a spousal IRA for a couple of years before you buy the home.

4) When it comes to all other draws that are exempt from the early withdrawal penalty (on Form 5329) – the money must also be drawn from an IRA. So, again, move money from your pension plans to an IRA before taking any draws.

5) However, when you draw money during a divorce, under the terms of a QDRO – qualified domestic relations order, it MUST come directly from a qualified retirement plan, not an IRA.

And remember, you can find answers to all kinds of questions about IRAs and other tax and business issues, free. Where? Where else? At www.TaxMama.com.

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