IRA and Taxes?

Question

I have an IRA, took out 15k to buy a car. Financed it instead and put 10k back in the bank IRA. The bank advisor DID NOT inform me that I could only put back 4k per year. I am now taxed and penalized on the other 6k and dont even have it since I put it back in the account.... Does anyone have any suggestions? I now owe 6k in taxes to the IRS....HELPPPPP!

this happened in 2006...the money was taken out and put back in the IRA after the 60 day time frame. Im mad bc now im paying taxes and pentalities on the 6k and i dont even have it..its back in the IRA....

Answer 1

Since you took more than 60 days to return the money to the IRA, and this was done in 2006, you are out of luck for 2006. The $15,000 was an early withdrawal, and you owe taxes and a 10% penalty on that for 2006. In addition, of the $10,000 that was put back into the account, $6000 of it is considered an excess contribution, so you owe a penalty on that.

You have a couple of steps to resolve this:

You can declare $4,000 of the $6,000 as your 2007 contribution, and you won't have to pay the penalty on that this year.

Then you can withdraw the remaining $2,000, and any interest/earnings from the $2,000 plus any earnings that the $4,000 gained during 2006. You will have to pay taxes and an early withdrawal penalty on the earnings/interest.

Your other option for the $2000 and earnings/interest is to let it sit in the IRA for another year, and pay the penalty for an excess contribution in 2007, and then use that money as your 2008 contribution.

I would suggest that you need a tax professional to help you work through this, since the bank is not supposed to advise you on taxes, and obviously did a poor job of doing so previously.

Answer 2

Start a ROTH IRA, this is the same as an IRA with one major difference, you pay the taxes now (which you will have to do anyway it sounds like), then you keep the money in the ROTH and when you take it out you don't pay taxes.

So take out the 6K, pay the taxes, and maybe have $4900 left over. Put the $4900 into a Roth and in only a few years your $4900 will have grown past where your 6K is now when you account for paying the taxes now rather then later.

Answer 3

$4000 is the limit for CONTRIBUTIONS to an IRA. I don't believe your $10,000 should be considered a contribution. If you withdraw funds from one IRA and deposit them into another IRA within 60 days, it counts as a tax free rollover. It sounds like this SHOULD have applied in your case. Consult a tax professional to see if you can't have the $10,000 re-characterized as a rollover. I don't know if its too late, but if you can, its the best long term option.

EDIT: If my suggestion is possible, it will require amending your return for the year this happened (unless it was 2007) and restating the early withdraw penalty. I don't recommend trying that without professional help.

Answer 4

asks lot of questions in the fructher...