I was listening to a radio talk show on financial planning. A older lady called to relate her story.
She was all alone, no relatives. Her income consisted of Social Security and a $165 a month pension. Her assets were $150,000 in an IRA, all invested in CDs earning 0.1%. She decided she could do better with the interest if she moved her CDs to a credit union (she stated she was terrified of losing her money which is why the IRAs were in CDs). The new interest rate was 0.5%, a whopping increase from less than nothing to nothing. She withdrew her CDs and “walked each check to the credit union” and deposited them in a new IRA.
Her actions caused a taxable withdrawal of the IRA funds because she did not use a direct transfer of the funds to the new IRA. The result was she had to pay $22,000 in taxes. She also stated her Social Security benefit decreased (likely because the additional income greatly increased her Medicare Part B premium) and she may have caused a portion of her benefit to become temporarily taxable.
NOTE BELOW:
There is so much that is sad about this case, but I suspect it is not all that unusual. It all happened because of a lack of understanding about admittedly complex and confusing issues. The fear of investing is understandable, but could have been overcome with some basic information. The IRA rules could have been easily understood simply by touching the microphone on Google and asking the question. Perhaps all this may have been beyond this poor women’s capabilities, but it shouldn’t be beyond yours.
This is yet another example among an endless supply illustrating how individual actions cause the largest problems in our lives.
Instead of encouraging our children to refuse to take standard tests in math and English, we should be pushing for basic financial and money management education in school starting in the early grades.
NOTE:
60-day rollover – If a distribution from an IRA or a retirement plan is paid directly to you, you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. Taxes (20%) will be withheld from a distribution from a retirement plan, so you’ll have to use other funds to roll over the full amount of the distribution.
QUINNSCOMMENTARY 
For a qualified plan, yes, there is withholding. From an ira, no, withholding is not required. See IRS tax topic number 557.
Obviously, not all experts know the rules either – I had to look it up.
And, don’t ever rely on a “financial advisor” concerning tax determinations.
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Seems confusing. Here is what the IRS website says. “Eligible Rollover Distributions
Withhold 20% of an eligible rollover distribution unless the recipient elected to have the distribution paid in a direct rollover to an eligible retirement plan, including an IRA. With certain exceptions, an eligible rollover distribution is the taxable part of any distribution from a qualified plan, governmental Internal Revenue Code section 457(b) plan, tax-sheltered annuity, or IRA. For more information, refer to Chapter 8 in Publication 15-A, Employer’s Supplemental Tax Guide.”
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On the other hand, now that I think of it, I have taken a IRA withdrawal and told them no withholding.
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My finanacial advisor didn’t have to “look it up”, expert Jack, and neither did my CPA
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Excellent posting, Mr. Quinn. Those income tax traps are easy to fall into. That is why I ask my financial advisor before any major changes.
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Smart move. Unfortunately that is not typical.
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I thought there was a ‘grace period’ if you took possession of an IRA and reinvested the exact same amount within 90 days?
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Here are the facts from the IRS. The problem is coming up with the taxes withheld to fully transfer what you took from the IRA.
60-day rollover – If a distribution from an IRA or a retirement plan is paid directly to you, you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. Taxes will be withheld from a distribution from a retirement plan, so you’ll have to use other funds to roll over the full amount of the distribution.
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I thought you ‘elected’ if taxes were to be withheld or not~ If you elected not to have them withheld and all is redeposited into another IRA within the 60 rollover time frame, their is no penalty.
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No, the withholding is mandatory unless it is a direct rollover. If there is a direct rollover there is nothing to tax.
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