Questions on QCD Tax Reporting and Roth Conversions Highlight Slott Report Mailbag

By Marvin Rotenberg, IRA Technical Expert

This week’s Slott Report Mailbag answers questions about reporting qualified charitable distributions on your tax return, rolling after-tax 401(k) contributions to a Roth IRA and taking Roth IRA losses if the investment has lost substantial value. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

My husband Tom directly transferred a $2,000 contribution from his IRA through his IRA custodian to a qualified charity in 2011 to take advantage of the law that expired in 2011.

The IRA custodian financial services company has not reported this direct contribution to a charity on its 1099 nor deducted the $2,000 from his taxable income on the 1099.

I have not seen a story on the exact reporting requirements of such a direct IRA distribution to a charity in 2011.

Questions:

1) Is the 1099, as stated above, correct? (The financial services firm insists that it is correct.)

2) What should the letter from the charity to my husband state? (The charity is insisting that it not name the financial services custodian or the check number.)

Thank you!

Myra Shaughnessy

P.S. We met Ed Slott a few years ago at a UBS financial services lecture.

Answer:
The 1099 you received from the IRA custodian appears to be correct. It should not reflect the qualified charitable distribution (QCD) made in 2011. Your 2011 income tax return is where the QCD is reported. On line 15a you would enter the total amount of the 1099 for the IRA distribution and line 15b would be the total amount on line 15a minus the QCD amount. Just to the right of line 15b write in “QCD.”

The letter from the charity should merely substantiate the fact that you made a contribution and the amount of the contribution.

2.

Mr. Slott,

Can “after-tax” contributions to my company-sponsored 401(k) be rolled over to a Roth IRA?

Answer:
The simple answer is yes. However, there is what is called a pro-rata rule that must generally be used when you have pre- and after-tax dollars being withdrawn from the 401(k) plan. This simply means that when the 401(k) plan contains both after-tax and pre-tax funds, then each dollar withdrawn from the 401(k) plan contains a percentage of tax-free and taxable funds based on the percentage of after- tax funds to the entire account balance.

Example:
Total amount in the 401(k) plan: $300,000
After-tax funds: $30,000

$30,000 / $300,000 = 10%
10% of every dollar withdrawn will be tax-free.
90% of every dollar withdrawn will be taxable.

3.

Ed,

I rolled an IRA over into a Roth and invested the Roth into a real-estate development in the Denver area, expecting a return of about 30%. It was actually in the closing stage when the market took the hit, the buyer backed out and the bank refused to renew the note; instead they foreclosed on the developer, who in turn filed bankruptcy and the investors lost 99% of their investment. Now, as the market down there recovers, the bank is reaping the millions of dollars from its opportune foreclosure strategy.

My question is this: can I take any of the losses that I took from the investment? Is there any strategy out there, where I might refund the Roth, and not lose the $50,000 Roth position?

Thank you,

Jim

Answer:
In order to take the loss, all Roth IRA funds must be withdrawn from all Roth IRAs owned by the client and the amount of basis (cost) must exceed the amount withdrawn. Any loss is claimed as a miscellaneous itemized deduction. The total of all miscellaneous deductions (including the IRA loss) must exceed 2% of adjusted gross income (AGI) to qualify as a deduction. If you are under age 59 1/2 there could be a 10% early withdrawal penalty if converted funds are withdrawn within five years of conversion. This information can be found in IRS Publication 590.

The only other option would be that a conversion could be recharacterized (means undone) no later than 10/15 of the year following the conversion. If the funds were valued a lot higher at the time of the conversion, the recharacterization would save on taxes paid.