Over the years I have had clients come to my office with a estimate of "schemes" and this is one that comes up repeatedly. You don't have the money for this year's Ira contribution, so you use the current Ira funds to make that contribution. Is it feasible? Yes. However, it is a trap for the unwary. Take the situation where you don't have enough cash to make a deductible offering to your Ira by April 15, 2011. The idea is that you can still take the tax deduction and have until June 12, 2011 to make the full ,000 offering for Tax Year 2010. All you need is a previously started Ira.
You begin by having ,250 distributed to you from your Ira on April 15th. Your bank is required to hold 20% (income tax withholding on an Ira Distribution), so you'll truly receive ,000. Once you have the ,000, immediately deposit it back into your Ira. If you do this before April 15, 2011, this counts as your deductible offering for the 2009 tax year. Then you have 59 days to "make up" the withdrawal-or to be taxed. Simply deposit ,250 (the "rollback") into the same inventory (Ira account) by June 12th to avoid taxes on the customary ,000 distribution made to you. In essence, this is a type of short-term loan from your Ira to make this year's deductible offering before the April 15 due date.
2010 Tax Brackets
Why is this a trap for the unwary? Because the 59 days creeps up on you very quickly, and if you miss, you have to pay a ten percent penalty plus taxes on the ,250 distribution. That is a 10% penalty of 5, plus taxes on the ,250. How much taxes will depend on how much other money you earn and your tax bracket, but is taxed "on the margin" or at the top level. If that is 28%, then you've paid a penalty of 5, plus added taxes of roughly ,750, or a total of ,375. How smart was that?
Furthermore, if you didn't regain the ,000 for the contributions in all of 2010 and an added three and one-half months (until April 15, 2011), why do you think you will have ,250 available by June 12, 2010? Funky schemes like this are recipes for disaster. Unless you know, and I mean truly Know, that you will have ,250 by June 12, then just put whatever estimate you can as a offering prior to April 15. Sometimes, that is the best you can do. Start recovery now. Spend less on the upcoming Christmas season and put away whatever you can by next April. Stay away from the traps for the unwary.
Consult your pro tax advisor, wage tax preparer, Cpa or attorney for added information and guidance exact to your singular facts and circumstances. If you have questions, contact the author. http://www.wakeforlaw.com/raleigh-income-tax-preparation.php
find Avoid the Trap - Don't Use Your Previously Funded Ira to Fund This Current Year's offering
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