[Richietwo]

I took the lump sum when I retired and put it in a mutual fund. I had to pay taxes on the entire amount. Now, if I remove this money from the mutual fund, will I have to pay tax on it? I hope that is enough to answer my quesiton.

[ScottGem]

No, if you already paid taxes on it, the amount you deposited becomes your cost basis. You only pay taxes on the gains over that cost basis.

[Richietwo]

Thanks for the response. In the meantime I called my mutal fund company and they said that they always withhold 20% tax on withdrawals. (I explained the situation the person just as Idid in my note here). Is he just going by the book?

[ScottGem]

Are you sure this isn't a tax-deffered mutual fund. I can see them holding 20% of the GAIN, but not of the withdrawal.

[Richietwo]

I will check the paper work but I'm scheduled to pay taxes on it for the '07 tax year. I'll let you know. Thanks for the help.

[KISS]

The distribution from a 401K or a work retirement plan must be trustee to trustee to avoid being taxed.

[ScottGem]

The distribution from a 401K or a work retirement plan must be trustee to trustee to avoid being taxed.

Actually that's not true. You have 60 days to roll ove3r the distribution to avoid tax liability and penalties.

But that's not the case with the OP. According to what he said, he received a distribution from a qualified retirement plan (not necessarily a 401K) in 2007. He elected to invest that distribution in a mutual fund and pay the tax on the distribution.

[KISS]

I urge you to read 2007 Publication 590 page 27.

In part:

Withholding requirement. Generally, if an eligible rollover distribution is paid directly to you, the payer must withhold 20% of it. This applies even if you plan to roll it over to a traditional IRA. You can avoid withholding by choosing the direct rollover option.

Yes, he did it by the book.

For IRA to IRA rollovers, the bank can require a signature to not to elect witholding. For employer plans, that answer is no.

[KISS]

Call the mutual company again. I assume that this is an IRA mutual fund.

And ask it this way: "I would like you to transfer this money to another IRA mutual fund directly. What are the witholding requirements?

Your basis in mutual funds, in general don't matter. For this reason, many mutual fund companies are not keeping track, but they should. If I remember right, there is one specific situation that you can claim a one time loss.

[ScottGem]

You have a valid point, but you originally stated incorrectly. Your initial post stated that the rollover had to be trustee to trustee to avoid being taxed. That's incorrect. If you had said "to avoid withholding", you would have been correct, but as you stated it it was misleading.

But you are still misreading the OP. he is under the impression that he investing an a NON TAX DEFERRED mutual fund. That's why he is paying the taxes on the distribution.

[KISS]

If the OP really took retirement funds and invested into a standard mutual fund, then:

I think he needs to determine what part of that money was previously taxed.
The cost basis.
The gain or loss.

And come up with the amount of money that was not previously taxed and pay the taxes on that amount.

The penalty if it was before retirement age.