Money taken from a retirement account can be tax-free if you move the money into another retirement account — as long as you meet one of the following requirements:
- The transfer is “trustee-to-trustee,” meaning it goes directly from the old account to the new account without any money actually being put in your hands. Or,
- You re-deposit the funds into the new account within 60 days of receiving the cash yourself.
As a taxpayer learned in Tax Court yesterday, “60 days” really does mean “60 days.”
The taxpayer had received money from her mother’s retirement account when her mother died. On the distribution form, the taxpayer requested that the money be sent directly to her in the form of a check. She cashed the check and then opened an IRA and put most of the money from the distribution into this new IRA — about 90 days after receiving the check.
The taxpayer received a 1099 for the distribution but she did not include the distribution as taxable income. The IRS disagreed and said the income should be taxable, and the Tax Court agreed. Even though the taxpayer apparently intended to roll-over the money from her mother’s account into a new IRA, it happened outside the 60-day window and thus becomes taxable in full.
On the bright side for the taxpayer, by paying tax in full now, she avoids having to take “beneficiary IRA” required minimum distributions. That’s another blog post for another day (perhaps a “Technical Tax Tuesday” article).