inheritance
I took out my dads IRA after my dad passed away, paid the taxes and put in into annuity and some in a Roth IRA. Paid taxes when I pulled it out and then had to report it as income , not sure why because I did not keep the money, I reinvested it. Will I end up paying taxes on it again when I start pulling the money out?
Permalink Submitted by Jose Morales on Tue, 2009-02-10 01:21
If you took a distribution from your father’s IRA account you did not have the option of putting it into your own IRA. If you wanted to move the funds to another investment, the only option available to you was to move it to an Beneficiary IRA by way of an IRA to IRA Transfer. Your deposit into the new IRA, which you may have characterized as a Rollover, should actually be considered a contribution. Any amounts over your maximum contribution limit would be an excess contribution and must be corrected.
Permalink Submitted by Alan Spross on Tue, 2009-02-10 02:50
I agree.
You will not be double taxed, including the steps you may need to take to correct the excess contributions to the Roth IRA. Only earnings on the portion of the contribution that is excess are subject to tax and penalty. However, if you made the excess contribution for 2007 or earlier, you have already incurred a 6% excise tax on it as well.
For the annuity, if it is a non qualified annuity, only the earnings will be taxed when you take distributions. However, the earnings would come out before the amount invested.
First, you must identify the amount of your Roth contribution that is excess. If you have earned income for the year the excess amount is equal to the total Roth contribution less the total of the amounts you were eligible to contribute and less any other Roth or traditional IRA contributions made for that year.
For which year did you make the contribution to the Roth IRA?
Permalink Submitted by Angie Dolezal on Tue, 2009-02-10 04:19
thanks for info. My Roth IRA was for $4,000 and I got that in 2007.
I’m still not sure why I had to report that as income. I paid the taxes for federal and state when I pulled it out of Edward Jones Account, and then I had to report it as income and ended up paying in $6,ooo again for taxes.
I am not understanding why I paid the taxes before I invested again because I do not have the money in my hands and then paid again as it was income to me.
Permalink Submitted by Alan Spross on Tue, 2009-02-10 05:00
That would not be correct.
First, let’s assume you were eligible for the contribution in 2007. You did have to pay taxes on the amount of your father’s IRA when you distributed it. You then make the Roth contribution with after tax money. If you were eligible for this contribution, it is fine as is. When you take money out of the Roth IRA, your regular contributions come out first tax and penalty free. So if you withdrew the 4,000 from the Roth IRA tomorrow, it would be tax free. You would report it on Form 8606, but no taxes would be due.
Now, if the Roth has earnings, for example if it is not worth 5,000, and you have not had a Roth IRA (this one or another) for 5 years, the earnings could be taxable, but the 4,000 would not. If you hold the Roth until after you are 59.5 and 5 years, then ALL distributions from the Roth will be tax free. That’s basically what a Roth IRA is for – you do not get a deduction for the contribution, but your distributions are tax free.
Do you still have this Roth IRA or have you taken out the money?
The annuity is probably NOT in an IRA. When you take money out of the annuity, your original investment will not be taxed again, but the earnings will be.
Bottom line is that all the funds are taxed one time except the earnings on the Roth IRA if you hold it to retirement. Those earnings are not taxed at all.
Permalink Submitted by Jose Morales on Tue, 2009-02-10 16:48
Another thing to note that may clarify some of your concerns, when you took a distribution from your father’s IRA you may have had “tax withholding.” This is probably what you are referring to when you state that you already paid the tax at the time of the distribution. Many people mistakenly believe that “withholding” = “paying taxes due” This is not the case. Tax withholding on a distribution is no different then tax withholding on your pay check. At the end of the year you still have to file your taxes, add up your Adjusted Gross Income, add up the total tax paid throughout the year, and add up your total tax liability. If your tax liability is greater than the amount withheld then you will still owe additional taxes.