Year End Tax Tips 2008 Q&A - IRAs
Tax Tips Q&A
Read Kevin McCormally's answers to tax questions submitted by NBR's viewers.
Click on a tax topic to explore related questions and answers.
This feature is intended to provide general information and education and should not be considered as investment or tax advice. Each individual should consult his or her own tax, financial, or investment advisor.
IRAs, 401(k)s, & Retirement
QUESTION: Are Estimated Taxes Due In Early Roth Conversion?
On November 20, you said if a person were to wait to
make a Traditional to Roth IRA conversion in January he/she could put
off paying the tax until April 2010. Wouldn't the IRS expect the tax to
be paid when the income is received; therefore, in January 2009 or at
least in the first quarter of 2009?
-- John Siegel, Eugene, OR
ANSWER:
You are correct that a conversion in January 2009 could trigger estimated tax reporting requirements. I didn't mention it for a couple of reasons (beyond my time constraints). One, there are exceptions to the penalty that would certainly waive it for many taxpayers and, two, it's possible to avoid the requirement by hiking withholding through the year. You are correct, though, that some taxpayers would NOT get the full year delay I mentioned.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Does A Capital Loss Help In IRA-to-Roth Conversion?
Can more than a $3000.00 loss in a regular account be
considered if one is converting an IRA to a Roth?
-- Louise Knutson, Richfield, MN
ANSWER:
The conversion of a traditional IRA to a Roth does not affect the capital gains and loss rules. So although the conversion would give you more taxable income for the year, still no more than $3,000 in net capital losses can be used to offset that income.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Requirements For Roth Conversion
I retired in Jan of 2008. My income includes Social
Security and dividends and capital gains from my investments. One of my
traditional IRA's I would like to convert to a Roth IRA. Can I do this
even though I have no income from a job but do have income from investments?
Is there a fee associated with conversions? Thank you.
-- C-A, Ft. Lauderdale, FL
ANSWER:
Unlike the rule for contributing to an IRA, you don't need income from a job or self employment to convert to a Roth. One restriction (until 2010) is that your income must be less than $100,000. And, yes, there is a "fee" for converting. You must pay tax, in your top tax bracket, on every dollar converted. It can be a good deal -- since converting means all future earnings are tax free, rather than just tax deferred -- if you have money outside the account to pay the tax. You don't want to deplete your nest egg.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Can I Choose *Which* IRA Account For My RMD?
I have two regular IRAs, one Roth, and one IRA Rollover
account. When the time arrives for me to take my minimum distribution,
must I withdraw from each account, or may I choose the account from which
I will take the distribution? Thanks,
-- PG, Long Beach, CA
ANSWER:
You determine your RMD based on the balance in all your traditional IRAs at the end of the previous year, but you can make the withdrawal from any account(s) you choose. There is no required distribution from the Roth account.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: IRA vs Roth Decisions If Above AGI Limit
Our AGI is above the limit to be able to contribute to a Roth IRA. Also, we could not convert existing Traditional IRA's into a Roth for the same reason. I understand as of 2010 that income of 100,000 for converting to a Roth will go away.
We were advised to now contribute to a non-deductible IRA for 2008, and then we can convert to a Roth in 2010 and only pay tax on the earnings part.But, someone else told us we could have a huge tax hit because we have previous IRA's that were deductible and when you convert, they take into account the total of ALL the IRA's.
We are in a high tax bracket as it is and have 8-10 years
to retire. Is this something we should consider. It gets very confusing
because we do not want to roll all the IRA's just the non-deductible one.
Thank you.
-- Diane, Santa Cruz, CA
ANSWER:
Great question....and a tough decision. Come 2010, the income limit on Roth conversions disappears. But, that doesn't mean nondeductible contributions now can be converted tax free in 2010. When you convert, the law requires that you aggregate all your traditional IRAs. So, if you have a total of $100,000 in your IRAs and $10,000 is nondeductible contributions, just 10% of any conversion would be tax free. The rest would be taxable as ordinary income in your tax bracket.
I love Roths and think the conversion can make sense even if you have to pay tax on it -- if you have money outside the IRA to make the payment so you don't dip into the account. After all, after the converstion, all earnings are tax free, not just tax deferred. But it's a tough decision, depending in part on future tax rates. If they're higher than they are now, paying sooner rather than later could save you money over the long haul. If they're lower, you might have paid more than you have to.
But, in answer to your question, no, you can't convert
only your nondeductible IRA contributions.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Can You Convert IRA With Income Over $100K?
In your piece on converting Traditional IRAs to Roth
IRAs you mention that if your IRA has been beaten down, & you have income
of less than $100k, you should consider. For those with greater than $100k
is it still possible to do this? Thanks very much. Station: KQED Name:
City & State:
-- Jeannine, San Mateo, CA
ANSWER:
Not this year. The way the law works now, conversions are allowed only by taxpayers with adjusted gross income (not counting the converted amount) of $100,000 or less. That income restriction disappears in 2010.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Transfering Annuity Into IRA
Can I transfer a annuity into my IRA without a tax penality?
-- Philip Shishmian, Millersburg, MI
ANSWER:
I'm sorry, but I don't understand your question. Why would you want to put an annuity -- which is already tax-deferred -- into an IRA? Do you mean, can I convert an IRA that contains an annuity into a Roth IRA, so that future payouts would be tax-free? If that's your question, the answer is yes. But you would have to pay tax on the full amount of the conversion.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Are There Penalties Or Estimated Taxes Due In Roth Conversion?
Just saw you on NBR concerning traditional ira conversion
to a Roth. If you did it in Jan would you not have to send in an estimated
tax payment in Jan or face the underpayment of estimated tax penalty?
I know it depends on many things but in general isn't it like that? You
said you could put off the tax bill until April 2010.
-- Gary Arnzen, Cincinnati, OH
ANSWER:
I confess! You are correct that estimated taxes might be due, but in many cases various exceptions to the penalty would mean they are not. Plus, you could also increase withholding on wages to spread the bill out over the full year, whereas a December conversion would demand full payment in April of 2009. But, I agree with you that some taxpayers would not get the full year's grace period. I'm sorry that the 90 seconds I get for a commentary won't allow me to get into all the details.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: What Will A Roth Conversion Cost?
I enjoy your segments on NBR-Thank you! Question? Our
income is >100,000$ this year and I would like to convert a Trad. IRA
to a Roth IRA. Can it be done, and how much will Uncle Sam get?
-- Jim, Indianapolis, IN
ANSWER:
Yes, it can be done. As for what it will cost you, it depends on your tax bracket. Every dollar you convert will show up in your taxable income. If your taxable income (that's after deductions and exemptions) is under $65,100 on a joint return, you're in the 15% bracket, so every dollar of the conversion until you hit $65,100 will be taxed at 15%. If your taxable income is over that -- or to the extent that a conversion pushes you over that $65,100 -- you're in the 25% bracket and the IRS will claim 25% of each dollar converted.
This is not a punishment tax. It is a sooner rather than
later tax. Those dollars would otherwise be taxed when you withdraw them
in retirement. If you are in a lower tax bracket then than now, you might
think you goofed. If you're in a higher bracket, you might feel like a
generous. Actually, I think the advantages of a Roth make it a good investment
even if you're in slightly lower tax bracket later than you are now. A
key is that you have money outside the IRA to pay the tax bill. You don't
want to dip into your nest egg to do it.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: What Is Taxed In Roth Conversion?
I wish to reduce my cap gain while values are low. On
transfer to Roth, do I get exempt from tax on dividends only or divs AND
cap gain when I finally sell? Can I switch more than 5000 per year?
-- Charles, Boston, MA
ANSWER:
You must report as taxable income everything you convert, not just the original contributions. Remember, the earnings inside the traditional IRA haven't been taxed . . . yet. They are taxed at the time of the conversion. There is no limit on how much you can convert. The $5,000 cap applies to annual contributions; there is no cap on the amount that can be converted.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: What Percent Of IRA To Roth Conversion Is Taxable?
If I convert my IRA to a roth IRA, What percentage would I have to pay in taxes? Also , Would it be better to convert before year end or wait until January? I am 78 Years of age with no retirement pay. Only social security.
-- Walter Volk, Aurora, CO
ANSWER:
You must report all the money you convert as taxable income, but in your case, it doesn't look like it would all be taxed.
Since it appears you have no taxable income, you can
convert $10,300 completely tax-free, since that amount would be protected
by your personal exemption and your standard deduction (I'm assuming you're
single.) The next $8,025 of a conversion would be taxed at 10%. The next
$24,525 would be hit with a 15% tax. Then you'd move into the 25% bracket.
I hope this helps.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Are There Tax Benefits To Converting To Roth?
To switch IRA to Roth while values are low. On transfer
will I be exempt from tax on divs or divs AND gains? Can I switch more
than 5000 per year? AGI qualifies.
-- Charley R., Westwood, MA
ANSWER:
When you convert to a Roth, ALL the money you convert is taxed, not just your original contribution. Remember, earnings inside the traditional IRA haven't been taxed yet. When you convert, every time is taxed as ordinary income (no capital gains treatment). The one exception is if you have made nondeductible contributions to your account.
There is no limit on how much you can convert. The $5,000
limit is on contributions. That is completely separate from conversions.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Who Else Is Talking About Waiving RMD?
About the RMD, I called my accountant, TIAA, and Charles
Schwab. No one had heard of such waiving as being under consideration.
Other than yourself , who has publicly stated that it is? I have not as
yet taken my RMD. Thank you
-- Elliot M., Ocean City, NJ
ANSWER:
Let's see, the President-elect of the United States, Barack Obama, for one. Sen. John McCain, for another. The AARP for a third. I'm surprised your contacts all professed ignorance on this point. Also, a bill is working its way through Congress that would waive RMD requirement (Sen. Kennedy is one of the sponsors)....but, unfortunately, only for next year.
I don't know what the odds are that it will be waived
for 2008, but I guarantee you that it is being considered. I think we'll
know for sure by the end of the first week of December.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Required Distributions With Roth IRAs
Are there required distributions with a Roth--before
59 1/2--after 59 1/2? On a recent show you talked aboiut distributions
at 59 1/2 with IRA's but did not mentions Roths specifically.
-- Jim, Seattle, WA
ANSWER:
Sorry, I was talking about required minimum distributions from traditional IRAs. One of the many advantages of a Roth is that the original owner is not subject to any minimum distribution rules. You never have to take a dime out of the account. (The IRS doesn't care because it doesn't get to tax withdrawals, anyway.)
A different rule applies to people who inherit a Roth
IRA. Although their withdrawals are tax-free, too, they are subject to
minimum distribution rules. They must either clean out the account within
five years after the year in which the original owner died or start withdrawals,
based on their life expectancy, by the end of the year after the year
in which the original owner died.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: What If I Convert To Roth, But Shouldn't?
Thank you for your discussion of Roth IRA conversions. What would happen if I did the conversion and then found my income was higher than expected and I no longer qualified?
-- J.A., San Francisco CA
ANSWER:
You could use the same method that I suggested for folks who convert in '08 and suffer further losses in their account. If you convert in '08 and discover in early '09 that your '08 income was over the $100,000 limit, you could "recharacterize" the account back to a traditional IRA....no tax would be due.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Donating RMD Directly To Charity
A couple of years ago an individual was allowed to make
a charitable donation of his IRA distribution. Does it still apply this
year.? If so, does the distribution have to be made directly from the
bank (or financial institution) to the charity? I would appreciate your
reply. Thank you.
-- Lora
ANSWER:
Yes, the right for taxpayers at least age 70 1/2 to contribute IRA distributions DIRECTLY to charity was reinstated for 2008 and 2009. (It had expired at the end of 2007.)
You can contribute up to $100,000 this way, even if that is more than your required minimum distribution for the year.
And, yes, the money must go directly to the charity. If you take a distribution and then donate the money to charity, you have to report the distribution as taxable income. Yes, you'd get a tax deduction for the contribution, but you're better off never including the payout in your income.
Some taxpayers have the IRA write the check to the charity
but, rather than having the IRA custodian send the check to the charity,
the donor send the check with a personal letter. The key is that the check
be made out to the charity, not to the individual.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Recharacterizing IRA Money To Roth
Kevin, RE: 2008 RMD: I have taken out my RMD for 2008 already. If it is deemed that RMD will not be required for 2008. Can I pay the taxes due on these withdrawals from a traditional IRA and then re-characterized this money as a ROTH? I sure hope so. This would be GREAT.
Love your helpful tips on NBReport.
-- Dolores Sears - Orcutt, KCET - Los Angeles
ANSWER:
Very clever idea, but I doubt it. The best I think you can hope for...and I fear it's a long shot...is that if Congress or the Treasury decides to waive the RMD requirement for 2008, the rule change will allow folks who've already taken their RMDs to recontribute the money. There is something of a precedent for this. When Congress waived the 10% early withdrawal penalty so Katrina victims could get at their IRA money early, that also allowed them to recontribute the money if they could afford to do so.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Taxes Due On Shares Moved From 401(k) To Taxable Account
I am 66 years old, retired since last year from Morgan Stanley. I own Morgan Stanley's shares in my 401(k) and my Employee Ownership Plan and my Employee Stock Purchase Plan. I acquired these shares through payroll deductions since 1995; I still keep the shares under those accounts at Morgan Stanley.
My question is: how would affect me tax wise If I sell them now or transfer the shares to a taxable account. I believe that either way I wouldn't own taxes, rather I would end up with a loss, since I would be selling at a lower price that I paid for them. Am I correct?
Thank you very much for taking my question.
-- Roger Perez, New York, NY
ANSWER:
The answer depends on how much"after-tax" money you paid for the shares. In the 401((k), for example, I assume the purchases were made with pre-tax money. If that's the case, then you have no "tax basis" in the share and even if they have lost money since you purchased them, the full amount realized on the sale (or transfer to a taxable account) would be taxed as ordinary income. If the purchases in the other plans were made with pre-tax money, the same thing goes. Check with an administrator of the plans for more details.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Already Taken My RMD!
What happens to those who already taken their RMDs if Congress allows reduced or no withdrawals?
-- Joseph Krauss, Coatesville, PA
ANSWER:
We don't know the answer to that. The lawmakers could allow 2008 RMDs to be reinvested in the IRA, or not. I have seen no discussion on this point, but after Katrina, taxpayers were allowed to dip into their IRAs penalty-free if they needed the money AND allowed to reinstate that money later if they could afford to do so. So, there is precedent for allowing withdrawals to be restored.
Again, no decisions have been made on this point, but
we expect the decisions to come soon.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Do Roth IRAs Have a RMD?
No mention of Roth IRA, which do not require min distribution ... or do they for over 70 1/2?
-- Jim, Seattle, WA
ANSWER:
The original owners of Roth IRAs never have to take withdrawals, regardless of their age. However, nonspouse beneficiaries who inherit Roth IRAs must make withdrawals. Withdrawals based on life expectancy must begin in the year following the year of the owner's death or all funds must be withdrawn within five years of the year of the owner's death.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Limited Partnership in IRA Account
Can I have limited partnership stock in a regular IRA account?
-- Dennis Scroggin, San Antonio, Tx
ANSWER:
Yes, you can own a limited partnership inside your IRA. You must be careful, though, if you invest in a publically traded partnership, or master limited partnership. MLPs sometimes throw off something called unrelated business taxable income (UBTI) which is TAXABLE even though it's inside the IRA, if it exceeds $1,000 in a year.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Can I Cancel My Distribution Event If Law Changes?
With regard to the issue of RMD you touched upon in yesterday segment,what about someone like myself who has already taken out 3/4 of the total amount required for 2008 tax year?
Is there anything that I might be able to do,i.e..., cancel the event if the change you mentioned will occur?
Thank you very much.
-- Sergio B, Venice, FL
ANSWER:
I have heard no discussion about allowing folks who have already taken their RMD -- or part of it -- to restore the money to their IRA. But it could happen if Congress or the government decides to waive the RMD requirement for 2008. We'll just have to wait and see. I think this matter will be settled by the first of December or so.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Conflicting Advice on Mandatory Withdrawal
We enjoy Kevin McCormally's tax tips on NBR. He said yesterday that, having reached age 70.5 this year, I must make my IRA withdrawal by Dec 31 of this year. This does not agree with my CPA, who said that I am allowed to do the withdrawal for 2008 in 2009 as long as it is done before April 15. Another withdrawal for 2009 will also be due in 2009. Kevin McCormally, please let me know whether my accountant is right or wrong.
Thanks for your help,
-- Fritz Port, Ann Arbor, MI
ANSWER:
Sorry for the confusion. Your accountant is almost correct. You must start taking distributions in the year you turn 70 1/2, but for that first year -- and that first year only -- the distribution can be delayed until as late as April 1 (not April 15) of the following year. So, since you reached age 70 1/2 in 2008, your 2008 distribution can be delayed to April 1, 2009. Your 2009 required distribution would have to be made by December 31 of 2009.
I hope this helps.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Waiver of IRA Withdrawals
I watched with interest Mr. McCormally's segment and looked it up again on your page. Can you tell me if:
-- the decision on this is definitely under consideration and when it will be made;
-- will it also apply to senior citizens not yet 70 1/2 but who have to take distributions from an inherited IRA and face the same problems.
Thank you very much for any information you can give
me.
-- L. Hicks
ANSWER:
Yes, a possible waiver of the RMD rule is definitely under consideration, both on Capitol Hill and at the U.S. Treasury. There is no way to know when a decision will be made, but I suspect we will know by December 1. Congress is likely to adjourn its lame duck session by the end of this week, but certainly before Thanksgiving. If Congress does not act, it would be up to Treasury and Congress's failure to act would put more pressure on the Treasury.
I have seen on mention of RMDs from inherited IRAs, although
I would assume that a waiver of the requirement would apply to all RMDs,
not just for those from accounts owned by taxpayers over age 70 1/2.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Combining IRA and 401(k) Funds For RMD
Dear Mr. McCormally, I enjoyed your tax comment of Monday, 17 November 2008, on the Nightly Business Report regarding the possible deferral of this year's required minimum distribution for seniors. I wonder whether you can answer me the following RMD question?
I reached age 70.5 in 2008. I have both an IRA account with Charles Schwab & Co., as well as an additional 401(k) account managed by T. Rowe Price from my past employer. I am currently retired. Based on my tax preparer's advice, I added the yearend 2007 amounts in each of the IRA and 401(k) accounts and calculated on the sum the amount due for my first RMD. I made the distribution earlier this year on the total due (sum of IRA and 401(k) accounts) by taking funds out of the IRA account. Now my 401(k) holder informs me that regardless of my earlier payment from the IRA for money in the 401(k), I must still take money out of the 401(k) account for RMB payment in 2008, since it is a separate account.
I checked with the IRS on this, and all I could get was reference to IRS Publications 575. In this publication I have been only able to find reference to the need for an RMD at age 70.5 but nothing about paying the required amount out of another tax-free account like an IRA. Can you please tell me whether combining the values of accounts like an IRA with a 401(k), and paying the RMDs with funds from only one is possible, and legal?
Thank you,
-- Alex Mihailovski, Kensington, California
ANSWER:
Oh, my. First, you got bad advice. You can't meet the 401(k) RMD requirement by taking funds out of an IRA.
If it has been less than 60 days since the withdrawal from the IRA, you can roll the money back into the account. If the 60 days has passed, however, the roll-over period has closed.
If the government waives the RMD rule for 2008, you're out of the woods.
If it does not, I suggest that you go to the advisor who have you the bad advice and ask for help. Depending on the amount of money involved, you may also want to contact an attorney.
I'm not an attorney, but one I spoke with suggested the
following: Ask the advisor to admit in writing that it gave you the bad
advice and get an agreement that the advisor will pay any penalty that
might be imposed if you do not take the RMD from the 401(k). With those
agreements in had, you could skip the 401(k) RMD and file a form 5329
-- http://www.irs.gov/pub/irs-pdf/i5329.pdf
-- showing that a penalty is due for failing to take the RMD, but asking
the IRS to waive the penalty because you were given bad advice.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Taxes Due On Roth Conversions
When you convert from an IRA to a Roth, do you pay taxes on the total amount in the account or only on the tax deductible contributions to the account?
-- J.A., San Francisco, CA
ANSWER:
Unless you have made nondeductible contributions to your traditional IRA, the full amount converted is taxed -- both your deductible contributions and the earnings on them. Since the money has not been taxed before, it is taxed at the time of the conversion. Then, in retirement, all withdrawals -- both the converted amount and all post-conversion earnings -- are tax-free.
If you have made nondeductible contributions, a portion
of the conversion is tax-free. Let's say you have $10,000 worth of nondeductible
contributions and the amount in your traditional IRA (or IRAs, if you
have more than one), is $50,000. In that case, 20% of any converted amount
would be tax-free, and the other 80% taxable.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Is the QCD Still In Effect?
The QCD "Qualified Charitable Distribution" was originally for two years. Where an amount could be withdrawn from a 401 account tax free and given to a charity, without a taxable decution of course. Is that feature no longer available? Thanks
-- John Walters, Lenexa, KS
ANSWER:
The provision to allow IRA owners age 70 1/2 and older to make direct contributions to charity (with the contribution not showing up in their taxable income) was extended to cover 2008 and 2009.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Where Will I Find The News About The RMD Change?
I appreciated your tip about waiting to see if I'll
be required to take my RMD this year, but you failed to mention where
I should look to determine the outcome.
-- Mark Schneider, Cambridge, MA
ANSWER:
Sorry...they only give me 90 seconds! I think it will
be big news if this change is made. I'm sure NBR will include it. Or keep
an eye on our Web site...kiplinger.com.
We'll post a story as soon as a decision is made. (It's a heck of a good
web site, anyway. I'm very proud of it.)
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: If Mandatory Distribution Is Suspended, Can I Return My Funds Without Penalty?
You mentioned that IRS is considering suspending the MDR for 2008. Since I already withdrew my MDR this year, shouldn't any relief rules allow me to return the funds to my IRA without penalty, even if more than 60 days have passed since the withdrawal?
-- D.A. LEO, North Palm Beach, Florida
ANSWER:
Heck, I don't even think there should be a 60-day limit. But, as far as I know, no one is talking about letting folks recontribute 2008 RMDs if the rule is waived. Sounds fair, but the more complicated this becomes, the less likely a waiver will be granted.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Can I Return My Mandatory Withdrawal To My IRA?
In reference to your suggestion that we delay paying our RMD for 2008,, sounds great , but how about us who have already paid, as you know you must pay your RMD for 2008, prior to doing an IRA Roth Conversion for 2008, Just more confusion, plus the deadline for paying the RMD for 2008 is in early December 2008, as required by your Broker, you can't just wait until December 31,2008. Can we get a refund??
-- Will Nelson, Tulsa, OK
ANSWER:
Good questions. First, not all brokers require RMDs in early December. Sorry about that. Second, as far as I know, no one is talking about allowing folks who have taken their RMDs to restore the money to their IRA and avoid the tax bill. I agree that that sounds fair, but would add to complications. The longer Congress and the Treasury wait to make a decision, the worse the odds look for a waiver.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Mandatory Withdrawals
Given that I reached 70 1/2yrs in 2008 and my IRA accts. are down almost 1/3rd their value, I will wait till next April to take my 1st payment, however my fear is that the market will not even be much improved by then. I hope the government will suspend Mandatory payments if the market stays low for a while or comes up with a solutution perhaps to pay a little less on the value of the accountat year end '07. Do you have any other suggestion? Sincerely,
-- Anita Eidelman, Newton, MA
ANSWER:
Sorry, but no, I can't think of any other advice. I think we need to wait to see what Congress, or the Treasury, does. If they don't waive the RMD requirement, you'll need to take your payout. You are correct that waiting until April 1, gives the market a bit more time to recover. Of course -- and I hate to say this -- if your positions fall further, you'll be in even worse shape. (To other viewers: You only get the next-April 1 choice for the year you turn 70 1/2; for older IRA owners, the RMD must come out by December 31.)
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Can I repurchase shares for an IRA without triggering a wash-sale?
Can a security be sold for a loss in a taxable account
and then purchased before 31 days elapse in a tax-deferred account (IRA)
without violating the IRS Wash rule?
-- Jay Charles, Evansville, Indiana
ANSWER:
Although the IRS unofficially went back an forth on this issue for years, earlier in 2008, the agency issued a revenue ruling holding that the repurchase of shares by an IRA would trigger the wash-sale rule...meaning the loss on the previous sale would not be deductible.
Applying the wash-sale rule to an IRA repurchase is even
more harsh than in a taxable account. With a taxable account, the denied
loss is added to the basis of the repurchased securities, effectively
simply postponing the tax savings until those securities are sold. Within
the IRA, however, the basis doesn't matter, since withdrawals from a traditional
IRA are fully taxed.
-- Kevin McCormally, Kiplinger Washington Editors
QUESTION: IRA Withdrawal
In 2005 I opened both an IRA and a ROTH. I opened both accounts with an initial investment of after tax money of 10K each. I then became totally disabled and wanted to start drawing out of my IRA. Through communication errors, the mutual fund company sent me a check for $15000.00 out of my IRA (all that was in the money market, but leaving about $3000.00 still in other mutual funds). I want to claim that 10K of that withdrawal was my initial investment and that only 5K should be taxable. Can I do it? &If so, how? If I can not do it, what can I do?
-- Dotoolittle Toolate, Wendell, Idaho
ANSWER:
This is very confusing. Back in 2005, the most any taxpayer was allowed to contribute to an IRA (either a traditional IRA or a Roth or a combination of the two) was $4,000...or $4,500 if the taxpayer was age 50 or older by the end of that year. (This assumes the money was not a rollover from a qualified plan.)
So, I don't understand how you could have contributed $20,000 to the accounts. The law provides for a penalty of 6% of the excess contribution, for each year the excess remains in the account.
You also should have reported the nondeductible traditional IRA contribution (the after-tax contribution) to the IRS on Form 8606. That form is used to track your "tax basis" in the account so that, when you make withdrawals, the portion representing the after-tax contribution is not taxed again. If you filed that form, it should be easy to determine whether any part of the payout is taxable. Any part that is not taxable is not subject to the early-withdrawal penalty (if you're under age 59 1/2) and it sounds like your disability could trigger a waiver of any penalty that might apply to any taxable part.
When it comes to distributions from a Roth IRA, you can always withdraw any or all of your contributions at any time without tax or penalty. So, there should be no tax on the amounts coming out of the Roths, since they represent less than you contributed. You report the distribution on a Form 8606.
Again, this looks like a real mess. I suggest you contact either a local IRS office for help or get together with an accountant or other knowledgeable tax preparer.
-- Kevin McCormally, Kiplinger's Personal Finance
