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Avoiding taxes on an IRA rollover


Dear Tax Talk,
In January 2003, you wrote an excellent column regarding a short-term loan from an individual retirement account. You stated that you could borrow from the individual IRA so long as the amount was repaid within 60 days. How is such a transaction recorded on a tax return? I presume the IRA trustee will issue a 1099-R for the loan amount. How then does the taxpayer record that loan (and repayment) without incurring a tax liability? -- John

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Dear John,
Note to readers: Flattery always helps. I've also written some excellent articles since then.

Generally, the amount of distributions from an IRA is reported on Form 1099-R. The IRS has managed to explain this form in only 16 pages. Basically, a distribution from an IRA that is repaid within 60 days is treated as a rollover. An IRA custodian most likely will issue a 1099-R that shows the amount in Box 1 as the amount distributed and the taxable amount in Box 2 as zero.

If, however, you rolled over the money to a different IRA custodian (i.e., you changed institutions), then the first custodian might show the whole amount as taxable. In this case, the second IRA custodian should issue you Form 5498 showing the amount of rollover contributions in Box 2. Similarly, if you withdrew the money in December 2003 and rolled it over in 2004, the custodian will issue a 1099-R showing the amount as taxable.

Report any rollover from one traditional IRA to the same or another traditional IRA on lines 15a and 15b of Form 1040 or on lines 11a and 11b of Form 1040A.

Enter the total amount of the distribution on line 15a of Form 1040 or on line 11a of Form 1040A. If the total amount was rolled over, enter zero on line 15b of Form 1040 or on line 11b of Form 1040A. If the total distribution was not rolled over (meaning repaid in 60 days), enter the taxable portion of the part that was not rolled over on line 15b of Form 1040 or on line 11b of Form 1040A. Put "Rollover" next to line 15b, Form 1040 or line 11b, Form 1040A. See the instructions on the forms.

If you rolled over the distribution in 2004, attach a statement explaining what you did.

-- Posted: Feb. 13, 2004




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