How to Tap IRA for a 59-Day Loan

Q: I am confused about how often I can move the funds in my individual retirement account. Can you please explain the rules?-- A.Q.R .

*

A: IRA fund movements fall into two general and very separate categories: rollovers and transfers. Each category has its own set of regulations.

Rollovers consist of the tax-free movement offunds between two qualified retirement plans in which the account holder becomes directly involved by taking possession of the funds at the outset of the transaction. These are permitted only once each during any consecutive 12-month period and must be completed within 60 days after you receive the assets to avoid taxation of the funds and any possible penalties for premature withdrawal. The rules apply to each of a taxpayer’s IRAs separately, meaning that if you have four IRAs you would be entitled to one rollover per account in a 12-month period.

Transfers are considered movements of funds between accounts in which only the account trustees--the bank, brokerage or other financial institution--are involved. So-called trustee-to-trustee transfers are permitted as often as the account holder wants.

If you are financially disciplined, rollovers can be a way of tapping your IRA for some much-needed quick cash. Financial advisers often suggest turning to your IRA if you need money to close a real estate deal, take a trip or make a loan to a child--but only if you are absolutely certain that you can redeposit the money within the 60-day limit. If you cannot make that deadline, the money will be subject to income taxes and possibly to the 10% federal and 2.5% California penalty for early IRA withdrawal

IRA rollovers are reported to the Internal Revenue Service. Income taxes are not automatically withheld, but taxpayers must be prepared to show proof to the IRS that the IRA funds have been reinvested in a new IRA to avoid taxation and penalties on the funds.

Rules for Deducting Casualty Losses

Q: Will you explain the rules for deducting casualty losses from your income taxes? I sustained about $15,000 worth of damage in the January earthquake.-- M.W .

*

A Your deductible casualty loss is calculated like this: First assess the amount of your losses not subject to any insurance reimbursement or other recovery. Now you must deduct $100 for each separate occurrence of casualty loss; the earthquake counts as a single occurrence. Then you must reduce this amount by 10% of your adjusted gross income.

Let’s assume you have a $50,000 adjusted gross income and that your $15,000 loss is not subject to any reimbursement or recovery. You are entitled to a tax deduction of $9,900. This was calculated by subtracting the $100-per-occurrence deduction and $5,000 (10% of adjusted gross income) from your loss.

Your loss is reported on IRS Form 4684.

Loss on Pretax IRA Not Deductible

Q: I lost $10,000 on my IRA investment. This money was deposited in the account on a pretax basis. Is my loss treated as any other investment loss? N.A.N .

*

A: Losses of pretax IRA funds are not deductible on your income tax filing because you never paid income taxes on that money to begin with.

However, if you had suffered losses on after-tax IRA funds, you would be allowed a deduction. But because the government wants to ensure that it gets its full share of our tax-deferred retirement savings, taxpayers claiming deductible losses of after-tax IRA funds must meet strict regulations. Under these guidelines, taxpayers must, in essence but not in reality, aggregate all their IRA investments--pretax as well as after-tax--to determine if their IRA withdrawals add up to less than the total tax basis of all the accounts. Furthermore, a deduction is not allowed until all the accounts have been fully depleted.

Deductions for Medical Premiums

Q: My wife and I have purchased long-term health insurance. May we include the premiums for this in itemized deductions?-- T.W.Y .

*

A: We’re assuming that by “long-term” insurance you mean insurance that will pay your expenses if you are confined to a nursing home. If this is the case, the premiums are not deductible because they are not strictly a medical expense. Confinement to a nursing home can be for reasons that are not strictly medical.

If you ever become a nursing home patient for medical reasons, you may consider your payments to the home a deductible medical expense. Any payments you receive from your insurance carrier will not be taxable.

Ginnie Mae Holders Should Hang On

Q: Six months ago, you advised Ginnie Mae investors not to bail out just because interest rate increases were driving down the value of their holdings. Do you still hold to that advice?-- H.B .

*

A: Yes. Unless you absolutely need the money or have discovered that your investment fund is operationally unsound, you should stay put and not be spooked by the market’s gyrations. Remember, Government National Mortgage Assn. securities, better known as Ginnie Maes, carry the “full faith and credit” of the U.S. government, which guarantees repayment of the principal. (Interest payments are not guaranteed, but the government’s history on this matter is quite encouraging.)

What concerns you and thousands of other investors is the fact that the value of old Ginnie Mae certificates has plummeted on the secondary market because the interest they carry is below current market rates. These fluctuations shouldn’t affect you unless you are actively trading Ginnie Maes.