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Author: JAM47 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25316  
Subject: IRA Mistake Date: 9/11/2011 9:32 PM
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A few years ago, I opened and IRA in my wife’s name under the mistaken notion that she was eligible in spite of the fact that I was covered under a qualified 401K. Once opened, I realized that the contributions to it were not tax exempt and I did pay income tax on that money. I believe I read at the time that I could just leave the funds in there until they would be eligible for pre tax status. That has not happened and I would like to transfer the funds into a more flexible account without the trading restrictions that come with an IRA such as complex options.

How do I transfer the funds to a traditional account without incurring taxes which I already paid, or do I just pull them out and account for it when filing taxes for this year? It sound like that could be a huge red flag to the IRS.

Thanks
Jim
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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24738 of 25316
Subject: Re: IRA Mistake Date: 9/12/2011 3:21 PM
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According to IRS Publication 17, Your Income Tax (available on the irs.gov web site), p 121, your nonworking spouse is eligible to contribute up to $5000/yr or $6000 if over age 50, up to the maximum amount of your earned income in any tax year to her spousal IRA.

Your participation in a 401K plan does not limit her eligibility. It merely reduces the income limit above which the contribution is no longer tax deductible.

So you have a non-deductible contribution to your IRA. You need to keep track of your non-deductible basis by filing Form 8606 with your income tax each year, but otherwise, this is a normal traditional IRA account. You may mix deductible and non-deductible contributions in the same account and you can even rollover other qualified accounts or 401Ks into the same account.

You may transfer your IRA account tax-free to any other custodian you choose. Usually that would be a discount broker or a mutual fund company, but you have your choice of which one you use. If you do a direct transfer, there are no tax implications. To do that, contact the firm you want to receive the account and ask their advice. Usually there are a few forms to fill out and they do the rest.

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Author: JAM47 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24739 of 25316
Subject: Re: IRA Mistake Date: 9/12/2011 7:59 PM
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Thanks,
That is a very informative answer. Looking at the Publication you referenced, I find that the reason why our contributions were not tax deductible was that I exceeded the AGI needed, not solely because

I assume, but am not sure, that when you say I may transfer my IRA tax-free to any other custodian I choose, that you mean to another IRA, not a traditional account. If it does mean that I can transfer to a traditional account, I have my answer.

I would like to transfer to a traditional account. Can I do so as long as I can show that the contributions were non deductible by referencing filed 8606 forms?

Jim

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24740 of 25316
Subject: Re: IRA Mistake Date: 9/13/2011 2:26 PM
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In order to maintain the tax free status of the transfer, it must be transferred to another IRA account. But that account can be at a discount broker allowing you to buy and sell stocks or mutual funds at will.

If the funds are transferred to a regular account, first they will take withholding, and you will pay income taxes on your gains and pay a 10% penalty. That is the expensive way. Keep it in an IRA.

Transfer to a regular account counts as a distribution. Partial distributions will be credited with a portion of the non-deductible contribution. A full distribution will be credits with all of it. But you will still pay a 10% penalty on the distribution.

If the account investments are worth less than your contribution, there may be a way to cancel the original contribution. For information on that aspect ask on the Tax Strategies board. They are the experts.

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