Why is rolling over an IRA account into another non-IRA account penalized?

Since my mother passed away, I have been trying to simplify my financial affairs. Between us, we had four accounts with Franklin-Templeton, so back last November, I decided to close three of them and roll the funds into the one that has state and Fedral tax-free dividends. The accountant that does my income taxes phoned me yesterday and said that I owe $36,000 in tax penalties. Apparently two of the accounts were designated as IRA accounts and were transfered into a non-IRA account. Why does an IRA account carry such penalties? Is there anything I can do now to ameliorate this?

A distribution from a traditional IRA account is taxable. The amounts you took from the IRA accounts will be added to your income for 2007. This is because the contributions to the IRA accounts, as well as the earnings in those accounts, have never been taxed.

You would have been able to keep the IRA accounts tax-sheltered, but since you have closed those accounts there is nothing you can do now to "undo" the transaction.

Since you inherited the accounts, there will not be a penalty for the distribution, only income tax.

On the positive side, you now have your inherited funds in an after-tax account which pays tax-free income.

IRA accounts have tax benefits and are designed to be very difficult to withdraw from. that's why there are huge penalties. They should have made you aware of this before allowing you to transfer the funds into another account. you can ask your accountatn if you can move the funds back into an IRA account to alleviate some of the liability.

Quite simply because that's the LAW. When you withdraw funds from a tax-preferenced account such as an IRA you must pay tax on the entire withdrawal. Additionally there may be penalties if you are under age 59 1/2. The penalties should not apply in your situation since it was an inherited account but you WILL pay income taxes on the withdrawals.

If you look at the paperwork that you signed when you withdrew the funds it was all explained to you there. If you didn't read it, you've now learned an expensive lesson about reading and understanding contracts before you act.

You could have rolled these over to alother IRA without paying any taxes. Unless it's been less than 60 days since you withdrew the funds it's now too late to do that.

They should have also withheld 20% for Federal income taxes when you took the withdrawals. That gets added to your other withholdings and payments on your tax return. However if you're in a higher tax bracket than 20% you will have extra taxes to pay when you file.

Your advisors really fell down on the job, or you did. Normally whenever money is withdrawn from an IRA, they tell you there are tax consequences and recommend withholding. Franklin-Templeton wouldn't get any of my money if they didn't advise you on this when you were moving the money around.

Money contributed to IRAs are pretax dollars in most cases, to be taxed when withdrawn. When withdrawn early, you are taxed on the income. If you filed 8606s, then you're off the hook for some of the money.

Probably nothing you can do, since it's done. See if the accounts can be re-characterized as IRAs, and if Franklin-Templeton will work this out for you, but chances are slim. If some of this was inherited money, from your mother to you, that may negate the tax on that portion, as there's no federal inheritance tax, only income tax on capital gains accrued on these funds since you received them.

I'll understand if you don't consider this a "best" answer, as it only includes information in the other answers. However, no single answer is complete.

In general, withdrawal from (traditional) IRA accounts is taxable, because the contributions were deducted when made, and the "agreement" your mother made with the government is that the funds are taxed when withdrawn. If some of the contributions were non-deductible at the time, then not all the distributions are taxable. You'd need to find (all, I'm afraid) your mother's tax returns to determine that, or talk to her accountant. Because the funds were made available on her death, there's no "early withdrawal" penalty, so we don't need to go into that.

You may have had income taxes withheld from the distribution. (It's on the form 1099-R.) If so, your accountant should record that on your tax return, reducing the net tax due.

If it had been less than 60 days since you transferred the funds, you could move the funds to a new IRA. But, obviously, you withdrew the funds in 2007, and it's now more than 60 days into 2008, so that doesn't apply.

An IRA account is restricted as far as taking money out, the other types of accounts aren't. You are past the time limit to do a tax-free rollover, so you're stuck with the tax and penalties.

Tax wasn't paid on the IRA when the money was put in, or on its growth, so is due now, since it's no longer in a tax-sheltered account.