IRS Knows About 401(k) Proceeds
Q: Earlier this year I asked my former employer to roll over my 401(k) proceeds to an IRA that I had opened at a bank for just that purpose. My employer sent me the check. However, I needed the money to pay tuition and deposited the check in my checking account. I understand that I owe both income taxes and an early withdrawal penalty to the state and federal governments. But if I don’t report this transaction, how will the Internal Revenue Service and the Franchise Tax Board find out? --G.M .
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For the record:
12:00 a.m. Sept. 24, 1995 For the Record
Los Angeles Times Sunday September 24, 1995 Home Edition Business Part D Page 5 Financial Desk 5 inches; 149 words Type of Material: Correction
An item in last week’s column on 1031 exchanges of investment property was in error. Taxpayers are not allowed to extract any cash from a tax-deferred exchange. In fact, for the transaction to meet IRS requirements, taxpayers may not receive any mortgage relief, cash or other “unlike” property from the exchange.
Another column item on whether individual retirement accounts are protected from creditors in a bankruptcy sparked many inquiries. California law clearly exempts IRAs and several other types of retirement plans from attachment by creditors. However, that same code also gives the court some discretion over those funds. The law permits debtors to shield funds in IRAs and other types of retirement accounts only to the extent that they are needed to support the debtor and his family during his retirement. Any excess funds could be subject to attachment. Experts say this provision would cover only a handful of taxpayers since their sources of retirement income would have to be large and the debtor would have to be fairly close to retirement age.
A: You don’t have to worry about the tax man not finding out about your early withdrawal. The distribution is automatically reported to the Internal Revenue Service and the state Franchise Tax Board through a copy of the 1099 form that you receive noting the transaction. Of course, you will be expected to show this income and pay the appropriate taxes and penalties--10% to the IRS and 2.5% to the Franchise Tax Board--when you file your tax return.
Law Protects IRAs From Court Judgments
Q: Is there any way to collect an outstanding debt by tapping the debtor’s individual retirement account? We have won a court judgment against this individual and are being repaid at the rate of $75 per month. But the debt is over $12,000 and we are anxious to get our money. --A.P .
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A: No. IRAs are protected from court judgments and bankruptcy creditors under Sect. 704.115 of the California Code of Civil Procedure.
Access to Spouse’s Benefits Is Limited
Q: I am entitled to a relatively small Social Security benefit on my own account. However, my wife’s account is much larger, and spousal benefits from her will be more than I am entitled to on my own. May I begin drawing benefits on my own account at age 62 and then switch to spousal benefits at age 65? My wife is 13 years younger than I. --L.B .
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A: If you begin drawing benefits on your own account at age 62, you are not entitled to full 50% spousal benefits at age 65. How much could you get at 65? The actual math is a bit complicated, but it will be somewhat less than 50% due to the fact that you began receiving payments at age 62.
However, the larger issue for you is the fact that your wife is 13 years younger than you and cannot begin collecting benefits until she turns age 62, at which point you will be 75. This is a critical point because spousal benefits are available only when the taxpayer on whose account the benefits are drawn actually begins receiving benefits. So, until your wife begins collecting payments, you are ineligible for spousal payments. Of course, you may continue to draw benefits on your own account until the point at which you are eligible for spousal benefits.
Onetime Tax Payment Is a Simple Process
Q: I have tried to get the IRS to answer this question, but they neither answer the phone nor their mail. How do I send the IRS some money to be applied to my 1995 tax bill? I have completed a onetime transaction that produced taxable income on which there is no withholding. I don’t need to make quarterly payments, just a onetime shot. What do I do? --B.C.G .
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A: The process is actually quite simple. You should get from the IRS a Form 1040 ES for the quarter in which you are reporting the income. The 1040 ES comes with four payment vouchers, one for each quarter of the year. You need file only the voucher for the appropriate quarter. You should complete the form--be absolutely sure to include your Social Security number--and mail it with your check to the appropriate IRS office.
You may get this form in person from one of four Los Angeles-area Internal Revenue Service offices or via phone. The phone number for the 24-hour automated form-order service is (800) 829-3676.
IRS branch offices with forms are located in the Federal Building in Downtown Los Angeles, 200 N. Los Angeles St., Fourth Floor; Federal Building in Van Nuys, 6230 Van Nuys Blvd., Room 1-N-16; Federal Building in Westwood, 11000 W. Wilshire Blvd., Room 7201, and the IRS office in El Monte at 9050 Flair Drive, Second Floor.
Sales Price, Not Cash Received, Is the Issue
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Q: Under a 1031 exchange, do you have to invest all the proceeds from the property you sell in the property you are purchasing, or is it possible to make a down payment with the proceeds and keep the remainder, while still deferring the taxable gain? -- E.S.V .
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A: The IRS requires only that the property you are purchasing be of equal or greater value than the property sold. What matters is the sales price, not the cash you receive from the transaction.
You may elect to put down only a portion of the cash you receive from the deal, and take a mortgage for the remainder. You are still allowed to defer taxes on any gain.
Be advised that these exchanges are tricky and usually require the help of a trained professional.
