Found the Roth IRA X Factor

[alo]

Thanks, justbroke...I read the article. Very interesting and I won't pretend i didn't have to read a few paragraphs twice to get the jist!

Thanks, Kawh...I'm past the 60 days so I guess it would be like making a new contribution.

And, when I finally hire one, maybe the attorney will have me make the contribution then delay filing until after 6 months. Not my preference as I'd rather get going on it!

[kawh]

I know this post is a little old but I had a medical procedure in 2011 and withdrew $12K from my Roth IRA to pay for it. I am now looking at receiving a tax return for about 5K from 2010. I was concerned that this would count as income since I plan to file BK shortly. But, now I am wondering if I can just deposit it back into my Roth IRA as a repayment. Thoughts?

If you withdrew the Roth IRA funds more than 60 days ago, and it sounds like it was in 2011, you can't "repay" the funds.
A valid 60-day rollover is the only way you could do a repayment.

You can do a contribution for the current tax year if you earned at least the amount you contribute. That can prevent a possible penalty for an IRA withdrawal done earlier the same tax year, as distributions are considered to be coming first from contributions, then withdrawals. If you contribute as much as you withdrew, it's like the withdrawal didn't happen, taxwise. Another useful thing about is that you can wait til you file the next year to make the IRA contribution, as long as it's before April 15th.

I've wondered what's to prevent someone from withdrawing $5000 from an IRA, making the $5000 contribution April 15th from a 2nd withdrawal (different tax year reporting), then doing a contribution the next year using a 3rd withdrawal, until finally they turn 59 and 1/2 and can withdraw with no penalty. If you withdrew in Jan, 2013 and used the money to make your 2012 contribution (to avoid penalty and/or tax), that would be the situation.

[kawh]

The nice thing about Roth IRAs is that you can withdraw your yearly contribution amounts without tax or penalty at any time. Only the earnings incur a 10% penalty if you're too young, and there are several exceptions to that.

[TheBajan]

Here in Michigan my atty told us that we could contribute to our IRA's is they were already established but that we couldn't open new IRA's. That was 8 months before we filed when we first consulted with him.

[justbroke]

I know this post is a little old but I had a medical procedure in 2011 and withdrew $12K from my Roth IRA to pay for it. I am now looking at receiving a tax return for about 5K from 2010. I was concerned that this would count as income since I plan to file BK shortly. But, now I am wondering if I can just deposit it back into my Roth IRA as a repayment. Thoughts?

It depends on where you live. As Des wrote, contributions to a Roth IRA are not exempt in Arizona if the contribution is within 120 days of filing.

For Florida, there is caselaw which supports the notion that moving funds into a Roth IRA immediately prior to filing, could be constituted as hindering, delaying or defrauding creditors. This is why I STRONGLY suggest that you work with an attorney on this important matter.

There are many cases from Florida ALL finding that stuffing money into an IRA on the eve of bankruptcy (or while insolvent) is nothing more than fraudulent. I think it was best said in In re Siervo, 2006 WL 3068841, *3 (Bankr. S.D. Fla. April 3, 2006)... that there is a "close line between pre-bankruptcy planning and the intent to hinder, delay or defraud creditors."

Here's some more caselaw for anyone that cares to read it. A recent ruling was from Judge Jenneman from In Re Asunmaa, Bankr. M.D. Fla, 2009, Case 09-bk-07428-KSJ. It was almost on point.

The Florida bar actually has an interesting article on this very matter referencing the case I listed (Asunmaa).

In re Jennings, 332 B.R. 465, 469 (Bankr. M.D. Fla. 2005)
In re Simms, 243 B.R. 156, 159 (Bankr. S.D. Fla. 2000)
In re Sanderson, 382 B.R. 595, 597 (Bankr. M.D. Fla. 2002)
In re Barker, 168 B.R. 773, 775 (Bankr. M.D. Fla. 1994)

[alo]

I know this post is a little old but I had a medical procedure in 2011 and withdrew $12K from my Roth IRA to pay for it. I am now looking at receiving a tax return for about 5K from 2010. I was concerned that this would count as income since I plan to file BK shortly. But, now I am wondering if I can just deposit it back into my Roth IRA as a repayment. Thoughts?

[mountanddo]

Good information. Thanks JB and Des.

[justbroke]

And to add more information... I was in a confirmed Chapter 13 and my plan vested all property back to me upon confirmation. The following was one of the provisions in my Confirmed Chapter 13 Plan of Reorganization.

All property shall revest in the Debtor upon confirmation of the Plan (11 USC § 1327(b)).

[despritfreya]

Withdrawing money from any retirement account, in an active Chapter 13, is not income.

The more I think about this the more I have to agree with JB, especially if the Plan is Confirmed. Once the money is removed from the IRA it is no longer "exempt" hence the reason for my “theoretical” comment. However, if the Plan is Confirmed, unless the Order Confirming states otherwise, property of the estate vests in the debtor and the debtor may use such property as necessary. Therefore, an early withdrawal from the IRA after Confirmation would not be "disposable income" - even on a theoretical basis.

Des.

[justbroke]

I have withdrawn money from a 401(k) during an active Chapter 13 without any issues. It may be a Trustee thing, but Chapter 13 Trustees are really about seeing you make it to the end. As my Trustee told me... "I don't make money unless you are successful!"

[despritfreya]

What if you withdraw those funds during an active Chapter 13? Wouldn't that be considered income and subject to adding to your DMI?

Theoretically it could, but who would know? You would have to report the early withdrawal on the tax return, pay the penalty and any income tax, but, the reality is this:

Once your Chapter 13 Plan is Confirmed, even if you have to supply tax returns to your Trustee on an annual basis, the Trustee's office is not likely to even look at them. Once the Plan is Confirmed, unless you have to file some Motion with the Court, your file is put away and the Trustee's office moves on to other files. So, if you don't rock the boat after Confirmation, it is unlikely that a Trustee will pick up on income fluctuations.

Des.

[justbroke]

Withdrawing money from any retirement account, in an active Chapter 13, is not income.

As already stated, people need to be aware of the very specific conditions for moving money from non-exempt to exempt assets. This is why I always suggest some asset protection consultations. Bankruptcy pre-planning is perfectly fine!

[mountanddo]

What if you withdraw those funds during an active Chapter 13? Wouldn't that be considered income and subject to adding to your DMI?

[ValleYum]

Thanks for the answers HHM & Des!! Appreciate the knowledge as always!

[despritfreya]

I found a way to legally protect cash before filling. . . You can open a Roth IRA. . . with the max of $5,000. It will not count for the liquidation test because it's exempt. . .You can save your cushion in a Roth and not have it used for the liquidation test.

Interestingly, this is correct under Illinois law and for many other states as well as Federal exemptions. However, the generalization needs to be qualified. Some states have limitations. For example, in Arizona, contributions made to such an IRA account within the 120 days prior to filing bk are not protected.

Des.