ANSWER

You don't report Roth contributions; although you do need to report the conversion (and pay tax on the converted amount) on your 2007 return. Use form 8606 http://www.irs.gov/pub/irs-pdf/f8606.pdf

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

You don't have to withdraw all the money at 70 1/2. You must start withdrawing it at that age (actually by April 1 of the year following the year you turn 70 1/2) or you can roll your balance over into an IRA and begin tapping it at that age. You base withdrawals on a special life-expectancy table that lets you spread withdrawals over 26.5 years. The longer you stretch out the payouts, the more time your money will have to grow tax-deferred. Of course, the more your money grows, the more tax you'll ultimately pay , but that's a good thing because it means you get more money. You'll find the withdrawal rules in IRS Publication 590: http://www.irs.gov/pub/irs-pdf/p590.pdf

Here's some info from the TSP site:

How long can I leave my money in the TSP?

If you do not want to withdraw your account when you leave Federal service, you can leave your entire account balance in the TSP. However, you must withdraw your entire balance (or begin receiving monthly payments from the TSP or from the TSP annuity vendor) by April 1 of the year following the year you turn 70 1/2 (or following the year you separate, if you are already over age 70 1/2 when you leave Federal service).

If you do not make a withdrawal by the required deadline, your TSP account must be paid to you in the form of an annuity, as required by law. If you do not provide the necessary information for the TSP to purchase an annuity for you (and your spouse, if applicable), or if you cannot be located, your account will be declared abandoned. You may later reclaim your account and choose a withdrawal option; however, you will receive no earnings from the date your account was declared abandoned.

What are "required minimum distributions?"

If you have separated from service, the IRS requires that you receive a certain portion of your account balance beginning in the year in which you become 70 1/2. This portion, known as a "required minimum distribution," is based on your life expectancy. If you do not make a full withdrawal or begin monthly payments by the year in which you become 70 1/2, the TSP must send you the required distribution before April 1 of the following year. When you choose a withdrawal option, the TSP will determine whether you are required to have a portion of your account paid directly to you as a minimum distribution. The TSP will notify you and make any required minimum distribution payments to you as necessary.

The minimum distribution requirement applies only to participants who have separated from Federal service. It does not apply to active employees, regardless of their age.

To learn more about the minimum distribution requirement, read the tax notice "Important Tax Information About Your TSP Withdrawal and Required Minimum Distributions."

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

You can't deduct a gift to your son. I suggest you use a Roth IRA...no deduction now (it's not worth much anyway as you've discovered) but tax-free income for your son in retirement.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Sorry, but no. When you convert to a Roth, you must total the non-deductible contributions to your traditional IRA (or IRAs if you have more than one) and figure the ratio of that total to the total amount in your traditional IRA(s). Say you make $10,000 of nondeductible contributions and your traditional IRAs are now worth $100,000. In that case, 10% of any conversion would be considered after-tax money (and thus not taxed) and the other 90% would be taxed.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

You report the 401(k) rollover on 16a and 16b. The corrective distribution from the 401(k) should be added to your W-2 amount and reported on line 7 (the amount was subtracted from W-2 income when it went into the 401(k), so this trues things up.)

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

That provision expired at the end of 2007, but at Kiplinger we fully expect it to be reinstated -- retroactive to January 1, 2008. If you want to be sure, wait until later in the year to make your gift. But I am very confident the rule will be restored.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Assuming this is your only Roth IRA, then, yes, you could deduct the loss -- if you itemize and you're not subject to the Alternative Minimum Tax.

Here's how it works: When you close a Roth IRA, you compare the amount you receive to your "basis" in the account. With a Roth, your basis is the total of contributions plus any conversions minus any earlier withdrawals. The difference is a loss. But it's not a capital loss to be reported on a Schedule D. Instead, it is an ordinary loss, which is considered a miscellaneous itemized deduction on a Schedule A. The trick there is that miscellaneous expenses are deductible only to the extent that they exceed 2% of your adjusted gross income.

Let's assume you close your loss and retrieve $2,000 -- leaving you with a loss of $10,500. If your AGI for 2008 is $50,000, the first $1,000 of your miscellaneous expenses (2% of $50,000) wouldn't be deductible. But you'd still be allowed to write-off $8,500.

If you're one of the increasing number of taxpayers hit by the AMT, however, you don't get this deduction. Miscellaneous deductions are not allowed under the AMT.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

You claim the Retirement Savers Credit on Form 8880: http://www.irs.gov/pub/irs-pdf/f8880.pdf

Here are the basic rules:

Introduction
You may be able to take a tax credit if you make eligible contributions (defined later) to a qualified retirement plan, an eligible deferred compensation plan, or an individual retirement arrangement (IRA). You may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly). This credit could reduce the federal income tax you pay dollar for dollar.

Can you claim the credit? If you make eligible contributions to a qualified retirement plan, an eligible deferred compensation plan, or an IRA, you can claim the credit if all of the following apply.

1. You were born before January 2, 1990.

2. You are not a full-time student (explained later).

3. No one else, such as your parent(s), claims an exemption for you on their tax return.

4. Your adjusted gross income (defined later) is not more than:

a. $52,000 if your filing status is married filing jointly,

b. $39,000 if your filing status is head of household, or

c. $26,000 if your filing status is single, married filing separately, or qualifying widow(er).

You'll find all the details in Publication 590: http://www.irs.gov/publications/p590/ch05.html

Good luck.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

I'd suggest that you report the payout as an '07 distribution, which will show good faith if the IRS questions whether you failed to make the required minimum distribution on time. The IRS can waive the 50% if you have a good reason. Also, note this item from our Kiplinger Tax Letter:

Good news for taxpayers who didn't take enough from a plan or IRA: Those folks needn't pay the penalty first and then seek a refund, IRS says. In the past, folks who failed to take a required minimum payout had to pay the 50% penalty up front, even if they had reasonable cause. Now, the Service has revised Form 5329 to allow filers to seek a waiver and attach an explanation. The penalty is due only if relief is denied.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

It's my favorite tax tip. If you have children who worked during 2007 -- any kind of job from baby sitting to working retail to delivering papers, any job that paid them income -- then they can have an IRA. Most kids would rather do anything other than save for retirement, of course, so I suggest that parents or grandparents who can afford it seed an IRA for the kids. The power of compounding is amazing over five or more decades.

The law demands that someone have earned income (from a job, not investments) to have an IRA, but it's okay for someone else to actually provide the money for the account. You can't put in more than the annual limit ($4,000 in 2007) or more than the child earned during the year, whichever is LESS. Some IRA custodians refuse to open IRAs for minors, but many are happy to. You'll find more info on kid IRAs at www.kiplinger.com.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Thanks, but I would hope that people who went to the trouble to make a qualified contribution would remember it at tax time. We expect this tax break to be resurrected for this and future years, so we'll be writing more about it. I hope that will job the memories of anyone who forgot. Thanks for your comment.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

I tried entering a rollover with code G into TurboTax (I used the desktop version) and it worked fine, reporting the distribution on lien 16a but nothing on 16b and nothing included in AGI. I suggest trying again. Be sure not to include anything in the box for the taxable portion of the distribution. If it was a direct rollover, it is tax free. Good luck.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Because your 401(k) contributions are made with pre-tax dollars, you don't get to deduct losses inside the account. Since money you withdraw from the 401(k) is fully taxable, pulling out LESS because of the losses will limit your tax bill on the withdrawals. You only need to keep track of any after-tax contributions to a 401(k) or IRA (which are rare).

You need to keep track of those contributions because they establish a basis in the account and -- to prevent paying tax on the same money twice -- part of each withdrawal in retirement is tax free, based on the ratio of the total in the account to the total of your nondeductible contributions. But, if you only make pre-tax contributions, you don't need to keep track...because 100% of withdrawals will be taxed.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

It's tough to know based on this info, but I fear it is possible that 32.5% of the IRA withdrawal could go to taxes. UP to 85% of your father's social security benefits could be taxable and, when added to the pension income, his taxable income could be $40,000 or so. After subtracting his personal exemption and standard deduction, that would leave him in the 25% federal tax bracket (it starts at $31,850 of taxable income for 2007). So, if he has a 7.5% state tax, too, that would add up to 32.5%.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

To avoid the excess contribution tax, the 2006 excess contribution and its earnings should have been withdrawn by October 15, 2007.

From the info you provide, I believe you owe the excess contribution tax (6% of the $500) on your 2007 return. Now, I believe you could leave all the money in the account and assume it's part of your 2007 contribution, and avoid the excess contribution tax in the future. See IRS Publication 590 for details. http://www.irs.gov/pub/irs-pdf/p590.pdf

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Yes, at least 50% and probably 85% of your benefits will be considered taxable income. The income tax is triggered when your income (which in this case is defined as taxable income plus 50% of social security benefits, plus any tax-exempt interest) exceeds $25,000 on a single return or $32,000 on a joint return. At those levels up to half of your benefits can be taxed. At higher levels, $32,000 on single returns and $44,000 on joint returns, up to 85% of benefits can (and usually are) taxed.

Some people refer to the social security earnings test as a tax. That's the rule that, if you make over a certain amount in a year, your benefits are reduced by $1 for every $2 or $3 over the limit. This really isn't a tax, but some people delay taking benefits until they stop working to avoid the reduction in benefits. The earnings test does NOT apply after you reach your normal retirement age, which you have.

As to whether you should pay back your benefits and claim a larger benefit in 2009 (that's to the delayed retirement credit), that's not really a tax question. It's a question about how long you're going to live (and I don't get into that!). If you don't need the money now, however, and you have every expectancy of living out your life expectancy and beyond, postponing your benefits to a later age would likely allow you to collect more benefits over your lifetime.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

It's called the retirement saver's credit or the credit for retirement savings. It's explained in this document from the IRS: http://www.irs.gov/newsroom/article/0,,id=172969,00.html

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

I'm assuming this is a traditional IRA, not a Roth. And, as the heir of an IRA, you are taxed on distributions just as the original owner would have been taxed. Report the distribution on line 15 of the Form 1040. It is completely taxable (assuming your father had not made any nontaxable contributions).

If it is a Roth IRA, distributions are tax-free to you.

One other thing, I'm assuming you were not the designated beneficiary of the account, but rather inherited the IRA under your father's will or intestate rules. Because, if you were the designated beneficiary, the fact that your father was over 70 1/2 has no bearing on your RMDs. You can base the payouts on your life expectancy. Be sure to double check this point.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Welcome to the world of bubble brackets, where higher income can push more income into the grasp of the IRS (like more of your Social Security benefits), effectively hiking your marginal tax rate.

As to whether you could have done something different: First, the long-term gain on the stock would be taxable, but it should be taxed at no more than 15%. Did you itemize deductions? Such a large unreimbursed medical expense sounds like it should have been deductible due what I assume is your low income.

Social Security is tax free only if your income (including half of your benefits) is less than $25,000 on a single return or $32,000 on a joint return. Medical expenses are deductible only to the extent they exceed 7.5% of your adjusted gross income. So, if your AGI was $20,000 before the $17,000 gain, and therefore $37,000 with it, the 7.5% of AGI test would mean about $3,000 of the expense wouldn't be deductible. So, about $14,000 would be deductible...and that's more than your standard deduction.

I'm just guessing on the numbers of course, but if you should have itemized and did not, you can file an amended return using Form 1040X and reclaim some of the tax.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Good news. The plan is required to report the net unrealized appreciation to you in box 6 of the 1099-R that reports the distribution. Ask the plan sponsor how you elect NUA treatment for the employer stock. http://www.irs.gov/pub/irs-pdf/f1099r.pdf

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

No, nothing changed in the law.

You can contribute to a traditional IRA up to the year you turn 70 1/2, regardless of your income. If you are covered by a retirement plan at work (like the 403(b), though, the right to deduct contributions is phased out at higher income levels. The deduction phases out as AGI rises from $52,000 to $62,000 on a single return and from $83,000 to $103,000 on a joint return. If your income is above the top of those levels you can still contribute to an IRA, you just can't deduct the contribution.

The rules are different for Roth IRAs. You can't contribute at all if your income is over $114,000 on a single return or over $166,000 on a joint return.

I hope this helps.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Yes, assuming you're talking about a traditional IRA. The only question is whether or not the contribution to the spousal IRA would be deductible. When one spouse has a company plan (the Keogh counts) and the other does not, the right to deduct contributions to the traditional IRA ($4,000 for 2007 or $5,000 if the taxpayer was at least 50 at the end of the year) phases out as adjusted gross income rises between $156,000 and $166,000.

If you're thinking of a Roth, for which there is no deduction, you the same $156,000 to $166,000 phase out zone determines if you can contribution at all. If your AGI is over $166,000 you can't contribute to a Roth for your wife or yourself (there's no age limit on Roth contributions).

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

You can't double up on 401(k) contributions. If you have a 401(k) at work and contributes the max, for example, then you can't contribute to a solo 401(k). However, you can open a SEP IRA and contribute up to 20% of net self-employment income (or 25% of compensation if you're incorporated) up to $45,000 for 2007 and $46,000 for 2008. With a SEP, you can't make an employer contribution like a solo 401(k), but the maximum limits are the same. And there are no catch-up contributions for 50+ with a SEP IRA.

As for the FICA contribution, it makes sense that if you have contributed the max on the OASDI portion ($97,500 for 2007; $102,000 for 2008) to just contribute the 1.45% for Medicare on the additional earnings.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

It sounds like this is deferred compensation and it would be taxed just as it would have been if you received it in the year you worked. So, I don't see why you'd get a refund, unless too much tax was withheld.

The law specifically says that deferred comp does NOT count as income for purposes of making an IRA contribution for the year received.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Great question. For purposes of contributing to a Roth, the income phase-out is based on "modified adjusted gross income" which is before deductions and exemptions are subtracted. To find your modified AGI for this test, start with adjusted gross income on line 37 of the 1040. Then you add:

* Any deduction you claimed for a regular contribution to a traditional IRA.

* Any deduction you claim for student loan interest or qualified tuition and related expenses.

*Any income you excluded because of the foreign earned income exclusion.

*Any exclusion or deduction you claimed for foreign housing.

*Any interest income from series EE bonds that you were able to exclude because you paid qualified higher education expenses.

*Any employer-paid adoption expense you excluded.

*Any amount claimed as domestic production activities deduction.

Then you subtract any amount in AGI due to a Roth conversion.

That gives you your modified AGI to determine if you can contribute to a Roth.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

I take it that you are married and your spouse is eligible for a retirement plan at work. That's the only reason someone without a retirement plan him or herself would be ineligible for a traditional IRA.

If that's the case, you may want to look into annuities, which provide for tax-deferred growth until you begin receiving payments. The tax break can be powerful, but you must beware that annuities are complicated animals and too-often carry high fees (there are exceptions). Also, if you choose a variable deferred annuity, in which your money is basically invested in mutual funds, using the annuity basically coverts earnings from capital gains to ordinary income. All taxable payouts from an annuity are treated as ordinary income and taxed in your top bracket.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

No, the law does not require you to claim all your legitimate deduction...although common sense does.

Passing up deductions so you can report more taxable income -- to support a bigger retirement fund deduction -- would be a costly mistake. Remember, your SEP contribution is limited to 20% of your net self-employment earnings. So, for every $1 you forego in legit deductions, you get to deposit only 20 extra cents in your SEP. I think you'll be far better off taking the deductions and investing in a taxable account.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

There is an exception to the 10% early (pre-age 59 1/2) distribution penalty for IRAs for fund used to pay qualifying higher education expense for yourself, your spouse or you children. You'll find the details in IRS Publication 590 that you'll find at http://www.irs.gov/pub/irs-pdf/p590.pdf

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Yes, you can make a catch up contribution for 2007 as long as you were age 50 by end of year, which you were. So, you can contribute $5,000 instead of the normal $4,000 for 2007. The question is whether you can deduct the contribution. You can, if neither you (nor your spouse) has a retirement plan at work. If either of you is covered by a retirement plan at work, you can't deduct the contribution. Also, your income is too high for a Roth IRA, so your only IRA choice is a traditional.

On the plus side, a traditional IRA gives you access to tax-deferred growth and, come 2010 when the $100,000 limit on Roth conversions disappears, the right to convert the money to a Roth. On the minus side, keeping track of nondeductible contributions to traditional IRAs can be a pain.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

If the K-1 is from an master limited partnership (MLP, also known as a publically traded partnership), it could be reporting unrelated business taxable income (UBTI), which, if it's over $1,000, actually IS subject to tax even though it's in an IRA. If this is the case, I believe the IRA has to file a 990-T form to report the income. Check with your IRA sponsor because I think it is the IRA, not you as the beneficiary, who must file the form (and pay the tax out of the IRA). This is very complicated stuff, and a reason many advisors suggest steering clear of MLPs in IRAs.

Good luck.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Good news. The excess distribution tax you refer to (aka the "success tax") was permanently repealed effective 1997. You don't have to worry about it. Regardless of the amount, payouts from your IRA will be treated as ordinary income, with no surtax applied.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

I agree that I emphasized the threat more than the insolvency "solution." However, because retirement assets are taken into account in the IRS's judgement of insolvency, the threat is a real one.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Are you talking about withdrawing funds from a traditional IRA? If so, then yes, there is an exception to the 10% early withdrawal penalty for up to $10,000 withdrawn to buy a first home. The money would still be taxed -- in your top tax bracket -- but no 10% penalty would apply.

If you have a Roth IRA, you can withdraw all of your contributions tax and penalty free at any time, and then up to $10,000 of earnings can also be withdrawn penalty free to purchase a first home.

If you're talking about a 401(k), there is NO exception to the 10% penalty for first time home purchasers.

If you qualify for the exception to the penalty, report it on form 8606: http://www.irs.gov/pub/irs-pdf/f8606.pdf

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Sorry about the accident, but I do have some good news on the tax front.

You can withdraw your contributions from a Roth at any time with no tax and no penalty. And, the first money that comes out of a Roth is considered a return of your contributions. So if the $12,000 you withdrew from your Roth was less than the amount you had contributed over the years, you owe neither tax nor penalty on any of it. You'll need to include a Form 8606 with your return to show that the payout was not taxable. http://www.irs.gov/pub/irs-pdf/f8606.pdf

If you did withdraw more than you had contributed the earnings are taxed, but there is no penalty on funds that went to pay medical bills that exceeded 7.5% of your adjusted gross income for the year. The money you spent on living expenses is not deductible, nor does it qualify for this exception to the 10% penalty.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Sorry, but the exception to the 10% penalty that applies to up to $10,000 withdrawn from an IRA prior to age 59 1/2 for the purchase of a first home does NOT apply to premature withdrawals from a 401(k). Such 401(k) withdrawals are taxed and penalized. You figure the penalty on Form 5329. http://www.irs.gov/pub/irs-pdf/f5329.pdf

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

The limits for 401(k)s and IRAs are separate; you can't make up in an IRA a shortfall in a 401(k). Since 2007 is over, you can't contribute any more to your 401(k) for that year.

Now, in addition to the 401(k), you may contribute up to $5,000 ($4,000 plus $1,000 catch up for those 50 and older) to an IRA for 2007. 2007 contributions can be made as late as April 15, 2008.

Whether or not you can deduct your IRA contribution depends on your income level. For those who have retirement plans at work, the right to deduct IRA contributions phases out as income rises between $52,000 and $62,000 on a single return and between $85,000 and $105,000 on a joint return.

If your income is too high for a deduction, consider making your contribution to a Roth IRA, if your income level permits it. For 2007, the right to use a Roth phases out as income rises between $156,000 and $166,000 on a joint return and between $99,000 and $114,000 on a single return.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Your age has nothing to do with whether or not Social Security benefits are taxable. That depends on your income level. Here's the basic rule:

The first step in determining whether or not your benefits are taxable is to find your "provisional income." That's basically your adjusted gross income plus any tax-exempt interest plus 50% of your Social Security benefits.

Your benefits are totally tax-free if your provisional income is less than $25,000 if you file a single or head-of-household return or less than $32,000 if you file a joint return. (Unlike many other thresholds in the tax law, these figures are not indexed to rise with inflation. And, that's not an oversight. Congress did it deliberately so that, over time, more and more beneficiaries would be subject to this tax.)

If your provisional income exceeds the threshold for your filing status, what portion of your benefits can be taxed depends on how high your income is.

If it is between $25,000 and $34,000 on a single or head-of-household return or between $32,000 and $44,000 on a joint return no more than half of your benefits can be taxed. The amount included in taxable income is the lesser of half of your benefits or half of the amount by which provisional income exceeds the trigger point.

Assume you and your spouse file a joint return. Your AGI for the year is $30,000, and you have an extra $4,000 of tax-free interest from municipal bonds and $5,000 of social security benefits. Adding your AGI ($30,000), your tax-exempt interest ($4,000) and half of your benefits ($2,500) gives you $36,500. That's $4,500 over the $32,000 threshold for joint returns. Since half of that amount ($2,250) is less than half your benefits ($2,500), the smaller amount is the part of your social security that is taxed.

When provisional income exceeds $34,000 on a single return or $44,000 on a joint return, things get more complicated, but the bottom line is this: In almost all cases, 85% of your benefits are taxed. The IRS has devised a worksheet for figuring how much of your benefits are taxable. You'll find it in the instructions for your tax return.

What about married couples who file separate returns? They can forget the $25,000/$32,000 and the $34,000/$44,000 thresholds. Their threshold is $0 -- and they can be certain that 85% of their social security benefits are taxable.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Yes, assuming your wife has sufficient income, she can contribute up to $5,000 ($6,000 if you'll be at least 50 by the end of the year) to a spousal IRA on your behalf. It can be either a traditional IRA or a Roth IRA...or a combination of the two. (If your income is over $169,000, you can't use the Roth.)

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

I'm assuming you're talking about a traditional IRA, not a Roth IRA. I'll also assume that you have not made any nondeductible contributions to the account. In that case, the amount withdrawn from your IRA is taxable income, to be reported on lines 15a and 15b on the front of your Form 1040.

If you were under age 59 1/2 at the time of the withdrawal you may owe a 10% penalty, too. The penalty is waived on up to $10,000 withdrawn from an IRA for a first time home purchase..and first time is defined as a home purchased when you have not owned a home in the previous two years....even if you owned a place earlier than that. If you qualify for this exception, it will save you up to $1,000.

You figure the penalty, and report the exception to it, on Form 5329 -- http://www.irs.gov/pub/irs-pdf/f5329.pdf

All the details are in IRS Publication 590 -- http://www.irs.gov/pub/irs-pdf/p590.pdf

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

No. Once you convert the IRA to a Roth, you eliminate the need to take required minimum distributions. You never have to tap a Roth account. You would still need to take RMDs from the traditional IRA once you reach age 70 1/2.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER:

No, you do not have to pay tax on the after-tax money that went into your IRA. You should have filed a Form 8606 for each year you made nondeductible contributions. This form is used to track your "tax basis" in your IRA. And, when you begin taking withdrawals from your IRA, you recover that basis tax-free on a proportional basis. Let's say your total IRA balance is $100,000 and you have made $10,000 in nondeductible contributions. In that case, 10% of any withdrawal would be tax free. If you have more than one traditional IRA, you figure the tax-free portion of your payouts based on the total balance in and the total basis in all your IRAs, not on the combination in any single IRA you happen to be tapping.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER:

Sorry, Mr. Holland, but losses inside an IRA are not deductible. I know that sounds harsh, but here's the reasoning: Because you were not taxed on the value of the shares when they were contributed to your account, you have no "tax basis" in the shares. Your basis is what you compare to the proceeds of a sale to determine gain or loss. Since you had no basis, you have no loss in the eyes of the IRS.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER:

Several questions, here, several answers, too.

In the old days, if you got a distribution and rolled it into an IRA, you were forbidden to mix in any other IRA money IF you ever wanted to roll that company plan distribution back into a new company plan. A few years ago, though, Congress threw out that silly rule. Now you can mix company plan rollovers and contributions if you like, and there's no reason not to do so.

Now, when it comes to an inherited IRA, the rules are different. If you are the surviving spouse, you can claim the IRA as your own, have it retitled in your name, and mix and match the money with other IRAs, however you please. If you are not a surviving spouse -- let's say you're a brother or sister, son or daughter--then the money must be kept separate. The IRA account will be titled as an inherited account and the mandatory distribution schedule will be different than the one that applies to your own IRAs.

I hope this answers your questions.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors