IRA Distribution and re-contribute

[rlescault]

I have two IRA accounts. I want to consolidate into the one that is creating a better return. The (not-as-good) financial institution wants to charge me $75 to process the "official" transfer of funds. There is no fee to take a distribution. I am over the age of 59 1/2 so I could just take a distribution, but I then want to put it back into the better account. We're only talking about $2,000.

Will the tax effects offset each other?

Other background: I'm still working and making over 100k/yr. Putting the 2k into the better account will not cause me to exceed the max. allowable contribution this year.

Thanks for your input!

[dmertz]

I think what you should be asking about is doing a distribution and rollover, not a distribution and new regular contribution, instead of doing a trustee-to-trustee transfer.  The only restriction on doing distributions and rollovers of IRAs instead of doing trustee-to-trustee transfers is that you are only permitted one such rollover in any 365-day period (366 days if the period includes February 29 of a leap year) across all of your traditional and Roth IRAs and the rollover contribution must be completed by the 60th day following the day you receive the distribution.  Rolling over the entire distribution makes the distribution nontaxable, reported on your tax return with a ROLLOVER notation which TurboTax will automatically do for you when you indicate that the distribution was moved to another retirement account.  Rollovers are not subject to any contribution limits because they are not regular contributions.

Make sure to decline the withholding on the distribution, otherwise you'll need to use other funds to complete the rollover of that portion by the rollover deadline.

[dmertz]

Come to think of it, since you are over age 59½ you could do a taxable distribution from the and a new $2,000 contribution to a traditional IRA as long as you have not yet reached the year in which you will reach age 70½, you have sufficient compensation (generally income in box 1 of a W-2 minus any amount in box 11 or net earnings from self-employment) and this contribution plus any other IRA contribution you make for the year does not exceed the annual contribution limit.  This would avoid any concern about the rollover limitation I mentioned in my earlier answer.  The distribution and new contribution will offset as long as you are eligible to deduct the IRA contribution; deductibility is determined by your modified AGI and whether or not you or your spouse is covered by a workplace retirement plan.  If the contribution is nondeductible, a portion of any future traditional IRA distributions will be nontaxable until all of your traditional IRA funds have been distributed and your basis in nondeductible traditional IRA contributions is fully recovered.

[rlescault]

Thanks for the depth of info for this!