How do I report this IRA distribution
In 2008 I contributed $5,000 to a Traditional IRA. No deduction was ever taken for the contribution.
In 2010 I emptyed the IRA and closed the account, receiving $4,700 (due to losses). No qualifying event occured (i.e. death, disability, first time home purchase, etc.).
The funds were not rolled over into another IRA. I am under 591/2 and employed.
I received a 1099-R showing the $4,700. It appears that the $4,700 is hitting my 1040 as taxable income in my turbo tax program. How do I report this distribution?
-Thanks!
Permalink Submitted by Alan Spross on Tue, 2011-04-19 21:21
How you report it depends on what the situation was in 2008:
1) You were not able to take the deduction because your income was too high, and the contribution was reported on your 2008 as non deductible on Form 8606
2) You might have qualified for the deduction and want to amend your 2008 return to take the deduction.
If 1) applies, OR if you failed to complete the 8606 form, you can download an 8606 for that year and send it to the IRS showing the non deductible contribution. That would make your 2010 distribution tax free if you have NO OTHER TIRA accounts. If you have any other TIRA, SEP or SIMPLE IRA accounts, please advise. You would then use an 8606 to report the 2010 distribution which would be tax and penalty free.
If 2) applies, you would get a refund on your 2008 return, but then the 2010 distribution would be taxable and subject to penalty.
Option 1 is better in most cases and is less work. Also, if this was your ONLY TIRA account and you are itemizing deductions for 2010, you would qualify for a misc deduction (but subject to the 2% of AGI limit) for the loss of $300 which can only be taken in the year you close all your IRAs of one type.
Did you extend your 2010 return or are just filing late?
Permalink Submitted by Anonymous (not verified) on Wed, 2011-04-20 00:41
Thanks!
My income was too high in 2008 to take a deduction. I don’t recall if I filed form 8606 back in 2008, I will check my files. If not, I will file one. I did file for an extension, so I have until October to resolve this.
The only retirement plans that I have are a Rollover IRA, ROTH IRA, and my 401(k).
I appreciate your help in this matter!
Permalink Submitted by Alan Spross on Wed, 2011-04-20 00:55
But that rollover IRA must be included in the calculation of the taxable amount. It will probably result in most of the distribution being taxable.
Permalink Submitted by Anonymous (not verified) on Wed, 2011-04-20 17:30
Great. So I will be taxed twice on the same income. First when I made the income and second when I take it out of a non-deductible IRA. How is this government running a deficit?
I guess there is no way around this. Geither defense?
Permalink Submitted by Alan Spross on Wed, 2011-04-20 17:53
In the short run, you will be taxed twice, but eventually as you take distributions or do conversions you will recover the full 5,000 amount tax free.
You will recover a small amount in 2010 depending on the size of the rollover IRA. For example, if the rollover IRA was valued at 45,300, your non deductible contribution would be 10% of the total value and you would recover 470 of your contribution tax free with the remaining 4,530 to come later. Form 8606 will calculate the amount you recover tax free each year you take a distribution.
There is a way out of this if your current 401k plan will accept IRA rollovers, but it is probably not worth the trouble for 5,000 of total non deductible contributions. But if the plan would accept the pre tax balance of your IRA as a rollover to the 401k, it would leave your remaining basis (eg 4,500) as your total TIRA balance. You could then convert that balance to your Roth IRA tax free, and your entire basis would be recovered. You could do this in 2011 if you wish, but it is alot of work when your basis is only around 4,500.