Rollover IRA's money went into regular trading account - no tax consequences

Unless the broker made a mistake. But tell the IRS, "it wasn't my fault." They will say tough luck pentalties and taxes at the very least. At worst they could say, "you knew about it, you didn't try to correct the mistake and didn't report it - willfully of course."

 

OK...just to make clear from what I understand...it's not a distribution, withdrawal....but transfer....which was supposed to be identical account (IRA) but he managed to get into his regular account.

 

I believe your friend will pay the IRS for the distribution including a pile of penalties in back interest if the IRA money did not go back into another rollover account. I did this a couple of times prior to retiring. One option in IRA rollover transfers is a check for the IRA amount made out to you. When they do this they give you the rules you must follow to avoid taxes. I did a few years back using a standard rollover IRA following IRS pub 590. IRS rules are specific in Publication 590. If the rollover was a cash check made directly to you. To notify the IRS what you did with the cash you must add Form 8606 to your tax return stating where the money ended up. The IRS says in 590:

Form 8606. You must complete Form 8606, and attach it to your return, if you receive a distribution from a traditional IRA and have ever made nondeductible contributions or rolled over after-tax amounts to any of your traditional IRAs. Using the form, you will figure the nontaxable distributions for 2010, and your total IRA basis for 2010 and earlier years.

I’m sure your friend got the distribution notice along with the check and another notice at the end of the tax year so form 8606 can be filled out. What I wrote above was for just one type of distribution. Publication 590 from the IRS goes into all the types of distributions. Publication 590 shows you how to compute the taxable part of your distribution.

So where they get you is when you don’t file an 8606 with your taxes. That is when the fireworks start.

 

this makes sense, maybe I don't know the full story.
But if they send you distribution check don't they (sending broker) keep certain amount for taxes? I think 20%?

 

you are correct, the distributor should have already done that since that is their job.

 

I read in the WSJ recently of something similar. When you donate to a charity you get a letter from the charity outlining how much of your donation is deductible. If the date you file your tax return is before the date of the letter your charitable deduction will be disallowed. The fact that it doesn't make sense since you make a legitimate donation doesn't matter.

 

That doesn't make any sense to me. The distributor does not know at time of distribution what you plan to do with your funds. You have 60 days to rollover into an IRA at a different custodian with no tax consequences, if you so choose.

If you don't roll over into another IRA, then you definitely have tax consequences, and you're the only one that the IRS will go after for penalties.

 

not sure if you have any ira account or not, here is an example of who suppose to do what;

How is my IRA withdrawal reported to the IRS?

Your IRA withdrawal (IRA distribution) is reported to the IRS by Fidelity on Form 1099R.


What is my withholding percentage?

IRS regulations require Fidelity to withhold federal income tax at the rate of 10% from your total withdrawal ...

 

Are you sure this applies to self-directed IRAs? I'm not a tax preparer by any stretch of the imagination, I trust my accountant... but I was under the impression the 20% withholding requirement only applied to employer 401Ks.

 

What I can't figure out is why this guy thinks he got away with such a good deal. I'd rather have my money in an IRA than personal any day.