Q: I withdrew funds from my home equity line and deposited the funds into my retirement account. A few years later I paid
off that HEQ line with funds from the same retirement account. Now the IRS considers those withdrawals as regular income. Do I have any recourse?
I m 70 years old so there was no early withdrawal penalties. My issue is the money I deposited into the retirement account from my HEQ was not regular income, just loan proceeds. But the IRS considers them regular income.
A: You should have thought to ask yourself this same question way back when you deposited new money into a retirement account that prohibits early withdrawals unless the known penalty is paid. The reason the IRS is seeking to tax the funds as regular income is because you violated the terms and conditions of the (IRA?) retirement account. Unless I miss my guess, the retirement account you have generates tax-free interest; right? However, there is also an important condition--namely that none of the money deposited into the account can be withdrawn until you reach a certain age; right? Well guess what? You are going to lose this argument with the IRS.
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