RE: IRA Tax

[rwwink]

My wife, when she retiured in 2006, rolled over her IRA into a bank
sponsered IRA. She invested $15,600 +/- at the time and was charged a
5 1/4% commision so her actual investment was $14,800 +/-. In
mid-2010, we rolled her IRA into a brokerage sponsered on which was
valued at $15,600 and is now valued at $14,400.We're doing some estate
planning and are thinking of cashing her IRA out (she's 73 and I'm 69)
Her" investment," ( $15,600-$14,400=$1200 loss) is showing a loss. Can
this loss be captured as a loss? Or is her loss actually
$14,800-$14,400=$400 or something else?
R. Wink

[Tad Borek]

Most IRAs are funded with pre-tax money, which means that their entire
value is taxable at the time of withdrawal. That's the case even if you
lost money on the investments you purchased in the IRA. For example, if
the account was funded with contributions totaling $20,000, and it's now
worth $14,400, and you withdrew the entire amount, you'd have $14,400 in
taxable income and no losses to declare anywhere. The reason is that the
original $20,000 had never been taxed.

It's possible you had after-tax contributions to the IRA, or to a
retirement plan that was rolled over into the IRA. In that case, if you
fully liquidated the IRA you could end up with net losses that would be
listed on your tax return as a miscellaneous itemized deduction. That'd
be unusual, but it's possible. Investopedia has a decent article on this
topic:
http://www.investopedia.com/articles/retirement/05/012505.asp

In general, you rarely want to cash out an IRA entirely given the income
tax that results.

-Tad

[Dave]

If she took an income tax deduction when funding the original IRA (the usual case) and cashes in the IRA, then she will receive a 1099-R from the bank showing a distribution of $14,400, which will be taxable in the tax year in which the distribution occurs.

If she didn't take the deduction, then she should have filed Form 8606 in each year she funded the IRA, establishing the basis as the total of her contributions. Then she would reconcile the 1099-R with the last Form 8606 to determine the taxable amount.

One question: Has she been taking the required minimum distributions since she turned 70-1/2? If not, there may be penalties due. Before paying the penalties, I would appeal to the IRS to forgive the penalty. See IRS Publication 590 (http://www.irs.gov/pub/irs-pdf/p590.pdf) for details.

Dave

[Ron Peterson]

She will have to withdraw a required minimum distribution each year or pay a penalty. If she hasn't done so, get some professional advice.

Whatever she withdraws from the IRA will be subject to income tax. I you're in a low tax bracket, liquidate the IRA and pay the tax.

You could convert to a Roth which doesn't require a minimum distribution, buy you would need to pay the taxes all at once.

--
Ron

[rwwink]

To answer some of this and to complicate it further:
When the IRA was first established, it was funded 50/50 by her first employer
contributions then 100(her)/0(employer) by her second employer which is where
she retired from. So the real investment is about 25% pretax (her
contributions), 25% matching employer contributions and 50% aftertax dollars.
It's been unfunded forthe last 8 yeaars and she's been taking the minimum
distributions for the last couple orf years. When she retired, she put the
funds into Franklin Funds (recommended by the bank and against my wishes) where
the amount went from $15,600-5 1/4% commission to about $13,800. We added about
$2,200 from a different saving (after tax) account and rolled it out of
Frainklin to a different fund.
As far as I can find, she's never gotton any forms from anyone on this account
except what we've been doing the last couple of years.
R. Wink

[Tad Borek]

On 2/19/2015 7:30 AM, rwwink wrote:
> When the IRA was first established, it was funded 50/50 by her first employer
> contributions then 100(her)/0(employer) by her second employer which is where
> she retired from. So the real investment is about 25% pretax (her
> contributions), 25% matching employer contributions and 50% aftertax dollars.

> ...We added about $2,200 from a different saving (after tax) account

Employer contributions are also pretax so I don't see where you get the
50% in aftertax dollars you mention above. If you mean the growth in the
account since those contributions were made, that is also pretax money.

The only part you've mentioned that seems a candidate for an after-tax
contribution is the $2,200. What matters isn't where the cash came from,
but rather whether the contribution netted you a tax deduction on that
year's income tax return. Normally it does; that's called a deductible
contribution. If it doesn't, though, you file a Form 8606 that
establishes it as a non-deductible contribution, which gives you basis
in your IRA (a portion that isn't taxed at withdrawal). So if you have
them, dig up the old tax returns and see.

-Tad