IRS Allows Transfer of Funds in an IRA

Q: When I retired, I rolled over my pension distribution into an individual retirement account, and over the years the value of the account has grown to significantly more than $100,000. I am aware that the amount in excess of $100,000 has no federal insurance protection, so I would like to put this excess into another IRA at a different institution where I would be entitled to the insurance coverage. My accountant has expressed concern that the IRS might view this move as a distribution of the account and subject it to income taxes. My accountant isn’t sure, and I can’t seem to get a straight answer from the IRS.--J. C. H.

A: You have nothing to worry about. The IRS allows you to transfer funds in one IRA to another IRA without paying taxes. You can make this transfer is one of two ways.

You may ask the institution holding your account, your trustee, to make the transfer to another institution of your choice. This is called a “trustee to trustee” transfer, and you are allowed to make as many of these transfers as you want without any tax penalty, so long as you do not withdraw any of the funds for your own use.

You also may withdraw any amount from your IRA and redeposit it in another IRA within 60 days without facing a tax penalty. This is called a rollover, and you are allow one of these transactions per year without a tax penalty. What you do with the money during the 60 days is your business, and if you redeposit the money within the allotted time, no questions are asked and no tax is assessed.

Although it is risky, some people have been known to tap their IRAs to get them over a temporary cash crunch. This strategy can work if you are virtually 100% certain that you can redeposit the full amount within the 60 days. However, if you miss the deadline, even by one day, you will have to pay income taxes, and possibly an early withdrawal penalty, on the account’s proceeds.