non-deductible IRA
Hello. I have a quick question regarding non-deductible IRA. I contributed to an IRA account that I could not take any deductions on the tax return in the past. Now I want to change the non-deductible IRA account into a regular investment account, direct rollover through institution. I didn’t benefit from any tax deductions. Those investments were reported to IRS on annual tax returns as non-deductible. Any tax consequence on this move? Any special tax forms I need to file?
Thanks
Trina
Permalink Submitted by Alan Spross on Thu, 2012-01-26 04:17
It sounds like you filed the proper Form 8606 for the year you made the non deductible contributions. If this is your ONLY IRA (including SEP or SIMPLE IRAs), then only the gains are taxable if you ask for a distribution. But all your IRAs must be considered.
For example, if you have a pre tax rollover IRA of 20,000 and the IRA account to which you made a contribution of 5,000 was distributed, then only 20% of your distribution would be tax free because the 5,000 is only 20% of your total IRA value. All the math to compute the taxable amount is shown on Form 8606, which you must file if you take an IRA distribution and have made prior non deductible contributions.
Permalink Submitted by trina jiang on Mon, 2012-02-06 04:18
Thanks for the info. However, I don’t plan to sell those investments. Just want to change the non-deductible into a regular investment account and hold the securities for a few more years. In another word, there won’t be any cash movement. In this situation, should I still report the gains or only when I sell the securities a few years later? What form should I file to IRS after the change?
Thanks in adavnce.
Trina
Permalink Submitted by Jose Morales on Mon, 2012-02-06 17:16
By moving the funds from an IRA to a regular investment account, even if the investment is not liquidated, it is a reportable distribution for which a 1099-R will be generated. “Distribution” when discussing IRAs does not necessarily mean that the investment itself is cashed out, only that it is removed from the custodial account and placed directly in your possession. You cannot separate out the non-deductible contributions from the earnings when distributing the funds in order to avoid any taxation. The taxable amount of the distribution will be proportionate to the amount of basis you have when compared to your total IRA value.