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by Mary Kay Foss, CPA
Are there tax penalties for or fees associated with moving investment funds from one brokerage firm to another? Are there tax penalties for taking non-qualified or qualified investment funds to use for real estate investments?
This is a two-part question, so let’s examine each part separately.
Moving Investment Funds to Another Brokerage Firm
Generally there are no tax penalties or fees associated with moving investment funds from one brokerage firm to another. Some brokerage firms charge a fee to close an account or for some other service in connection with the transfer. Those fees would be a miscellaneous deduction subject to the 2 percent limitation rule. (Per the IRS, “You can claim the amount of expenses that is more than 2 percent of your adjusted gross income.” For additional information, see IRS Publication 529, available on its website.)
If the investment is a retirement fund (IRA or SEP, for example), you could face tax consequences. For example, if you took a substantially equal periodic payment under Sec 72(t) to avoid a 10 percent early distribution penalty, you might have to pay the penalty if the asset transfer is delayed. If the investment was a SIMPLE IRA that had been in place less than two years, a 25 percent penalty could apply.
Real Estate Investments
Qualified investment funds are retirement funds; non-qualified investment funds are those that have no tax deferral involved.
There are no fees or penalties in using non-qualified investment funds other than any income tax involved in selling the investments to raise funds to acquire the real estate.
Using qualified investment funds for real estate investments can lead to problems, however. Many IRA custodians will not handle non-liquid investments such as real estate — so it’s necessary to transfer the funds to a new custodian. If the funds are rolled over rather than transferred, a 10 percent penalty could apply if the funds aren’t in another qualified fund within 60 days. Also only one rollover per 365 day year is permitted; transfers can be unlimited.
Then there are restrictions in the acquisition of the real estate. The IRA custodian — not the IRA owner — would have to acquire the real estate. A slip-up here could disqualify the IRA, making it 100 percent taxable and subject to penalties. And difficulties associated with real estate investment could prohibit the transaction from being part of an IRA.
Investing in an IRA is a great way to grow funds for your eventual retirement. I urge you to consult with a qualified adviser, such as a CPA, to discuss how any investment fund transfers you contemplate will affect both your tax obligations and your retirement preparations.
Mary Kay Foss, CPA, is a director at Sweeney Kovar, LLP, in Danville.
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