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.ThanksJim
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.
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
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.