401k
401k Information

Ira Distribution

The unpleasant TRIGGER word in the IRS dictionary is “IRD” [I]ncome in [R]espect of a [D]ecedent, Internal Revenue Code (IRC) Section 691. Income in Respect of a Decedent (IRD) refers to those amounts to which a decedent was entitled as gross income, but which were not properly includable in computing the decedent’s taxable income for the taxable year ending with the date of the decedent’s death [or] for a previous taxable year under the method of accounting employed by the decedent. Pursuant to Sec. 691, the amount of the IRA distribution is included in the gross income of the beneficiary for the tax year when it is received. Simply stated, the government allowed you to post-pone the tax while you were alive. Now, they want to collect, period.

The baby boomer generation needs to understand and master the total significance of IRD, because they have accumulated significant wealth creating Taxable Estates. IRC Sec. 2031 defines and controls the valuation of the decedent’s gross estate to include the value of all assets at the time of the decedent’s death, real or personal, tangible or intangible, wherever situated. A decedent’s estate may include stocks and securities, real estate, business interests, personal effects, annuities, trusts, IRAs, and other qualified plans.

Because of the complex calculation of IRD, the IRA can be included in both the estate tax return and the income tax return of the recipient, thus creating the potential 77% tax-trap of double taxation.
What’s IRD taxable income?

In order to determine whether an item of income is IRD, one must first determine how the decedent would have been taxable in his hands under IRC Section 691(a)(3), then he must consider the accounting method that was employed by the decedent. Generally, cash basis taxpayers only include “actual” cash received or constructive receipt (i.e. Interest on a CD) on the decedent’s date of death. Regardless of the accounting method employed by the decedent, IRD is subject to income taxes on a current basis when the triggering event occurs, generally the actual receipt of the income by the beneficiary.

A thorn on your wealth transfer to your next generation.
Rev. Rul. 92-47 holds that a distribution to the “beneficiary of a decedent’s IRA” is IRD (Income in Respect of a Decedent) under Sec. 691.

Pursuant to Sec. 691, the amount of the IRA distribution is included in the gross income of the beneficiary for the tax year when it is received. However, Sec. 642(c)(2) provides that an estate or a trust shall be allowed a deduction for any amount that is permanently set aside for charitable purposes.

Distributions from an IRA are taxable to the recipient. Distributions must begin not later than the required beginning date and continue over the life of the IRA owner [or] over the lives of the IRA owner and a designated beneficiary, IRC Sec. 401(a)(9)(A).

There are ways to mitigate this unpleasant result. Implementation of any large IRA plan requires careful attention for the IRS requirements and estate tax considerations. The simplistic catch-all solution being bandied about is the “stretch-IRA.” This solution requires “stretching” IRA distributions to a much younger beneficiary other than the owner, i.e., over the life of your grandchild, which is longer than your own.
Stretch IRA and Estate Tax Problems

Stretch IRAs are okay for those with no estate tax problem. Stretch IRAs do not work for those individuals with estate tax problems.

Why does the Stretch IRA not work? Because when the stretch IRA passes to a younger heir, estate taxes are due. If the younger heir receives a million dollar IRA, there would be a ,500,000 estate tax due. Where is the younger heir going to get ,500,000 to pay the IRS?

The presumption is that the heir will take the ,500,000 out of the IRA. When the heir takes out ,500,000 from the stretch IRA, it is taxable income and income taxes are due on that money.

This statement is required by IRS regulations (31 CFR Part 10, 10.35): Circular 230 disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein

To learn more about how to protect your IRA, reduce IRA taxes and have a personal assessment of your portfolio contact Best IRA Rescue. We provide professional services in: precise asset protection systems; tax-ree wealth creation systems; advanced income tax tax-deferred strategies; implementation of tax efficient transfers to your next generation elimination of the probate process; and the elimination of the only voluntary estate tax system.

Frequently Asked Questions

  1. QUESTION:
    Do I get a tax refund from an IRA distribution received back in 2005?
    In 2005, I received a distribution from an IRA. The IRA was my mother’s and she died in 2005. The money was somewhere between 16 and 17,000. I did not file a 2005 tax return. I want to do so asap and am curious as to whether or not I should expect any kind of a refund from this money??? Thanks very much!

    • ANSWER:
      Unfortunately, you don’t receive a refund for taking a distribution from an IRA. What happens is you are subject to PAYING taxes on the distribution because funds in an IRA are in a tax deferred status until they are removed.

      If you didn’t elect to withhold the taxes at the time you did your beneficiary distribution, then you were obligated to report and pay it when you filed your taxes for that year. The bank is also required to report this transaction to the IRS, which I am sure they did.

      In your case, I would seek tax advice. Being that the IRS is normally two years behind, you may be subject to an audit in the next year or two.

  2. QUESTION:
    What form do I download for reporting half of my IRA distribution income?
    I converted a ,000 IRA to a Roth IRA in 2010. I just found out that I can report half of my IRA distribution (,500) this year, and the rest next year. What IRS form do I download for this? How would I do it for my Michigan tax return? Or would I be required to report all k for that?

    • ANSWER:
      Use Form 8606. You can download it directly from the IRS here: http://www.irs.gov/pub/irs-pdf/f8606.pdf

      One correction, though: Your report either the entire conversion amount in 2010, or you report half in in 2011 and 2012. You cannot report half in 2010 and half in 2011.

  3. QUESTION:
    Questions about IRA distribution for first time home purchase?
    In November of 2006, I purchased my first home. I took a combined ,000 in early distributions from 2 traditional IRA’s to finance a downpayment. I know I that up to ,000 of this will have the 10% penalty waved for first time home purchase expenses. I have 2 questions. What qualifies as a home purchase expense and what form do I use to prove to the IRS that the money from the early distribution was used for a first time home purchase?

    • ANSWER:
      If you meet one of the exceptions to the tax, and your Form 1099–R does not have a distribution code “2″, “3″, or “4″ in the box labeled “distribution code(s)”, or if the code shown is incorrect, you must file Form 5329 to claim the exception.

      1st time home purchase means that this is the first home you and/or you spouse have ever owned,

      http://www.irs.gov/publications/p575/index.html

  4. QUESTION:
    How can I donate my annual IRA distribution to charity?
    What are the mechanics of contributing my annual IRA distribution to charity?
    Apparently new tax rules allow this transfer without including the distribution in my income.

    • ANSWER:
      Charitable Remainder Trusts (CRT)

      This one is a little exotic, requires more help from more professionals, but can be very rewarding to everyone concerned, and actually make you money in the long run.

      Check out the book
      Do well by Doing Good, by Keith E. Gregg
      (The modern way to create income, save taxes and benefit your favorite charities)

      If your library doesn’t have it, have them get it through the Interlibrary Loan system.

  5. QUESTION:
    can my parent set up a trust to receive the distribution from an IRA?
    my parent is turning 59.5 next year. she has no income and only a minimal hmo for insurance. she has virtually no savings but she has 15k from an IRA that’s been sitting untouched for almost 10 years. she wants to apply for medicaid next year, but the IRA distribution may preclude it if she shows income on her tax returns. so, instead of her receiving the IRA distributions individually, can she: a) have it distributed to another individual; or b) have it distributed to a trust of some sort (i.e. some vehicle that will not affect her medicaid application)? if yes, what kind of trust? who should i talk to in order to get one set up for her. thanks.

    • ANSWER:
      1) She cannot have more than ,000 of “countable assets” in her name to qualify for medicaid, in most states. check her state, maybe ,500, etc. All IRA’s are countable, as well as savings accounts, various other items.

      2) You apparantly know the rule about penalties (10%) for early withdrawal from retirement plans before age 59.5. Are you aware of the exceptions allowed in section 72(t) of the tax code? Some of those may help her. Go to www.irs.gov and search, or just google or yahoo 72(t).

      3) Trusts as a help? No way. Living or revocable, family, etc: they are still her assets. Irrevocable? They are gifts and you trigger a waiting period. Too complex for this discussion.

      4) I am wracking my brain over this concern about income precluding her benefits; how is that a problem? That applies to VA improved pension benefits, but here’s how income applies to the medicaid formula: after her basic approval for medicaid, any monthly income she has, like social security, pension, annuity, and the like goes first to paying her medicaid expenses. She gets something like /month to spend at her discretion. Medicaid pays all remaining approved expenses. Past income doesn’t matter, but they may ask what happened to the money. Legitimate expenses, no problem, but if you tried to hide money, pay relatives illegitimately, gift, etc, you trigger that waiting period again.

      Hope this helps. You might consult an “elder care attorney” if more specifics are desired. I am a Chartered Financial Consultant who has done seminars including these matters for about 6 years; the field changes quite often.

  6. QUESTION:
    How do you resolve a bank tax reporting error for a qualified distribution from a Roth IRA?
    I took a qualified early Roth IRA distribution as a first time homebuyer in 2006. What happens if my bank incorrectly codes this transaction as non-qualified? Will the IRS understand what actually happened?

    • ANSWER:
      The bank will assume you made a distribution from your roth ira period. It is up to you to justify to the irs that it is not taxable. You do this by filing the proper forms with your tax return (attached to it)

      5329 This tells the IRS that you are or are not subject to the 10% early withdrawal penalty because you are under 59 1/2 or why you are exempt if you are a first time home buyer taking out up to ,000

      8606 (page 2, part III lines 19-25) This tells the IRS how much of the distribution is basis reduction and how much is taxable income.

      Do not forget on a roth, you get your basis back then you have taxable income, unless you contributed the funds in the last 5 years. First time home buys can take ,000 off

      KEEP YOUR DOCUMENTS AND SUPPORT FOR 3 YEARS

  7. QUESTION:
    On what line on form 5329 do I indicate that my IRA distribution went to buying my first house?
    I need to file a 5329 with the IRS because I took a distribution from my IRA to buy my first house. I am very confused by the instructions on IRS web site. What line do I need to fill out to indicate that my distribution was to purchase first home?
    Thanks in Advance

    • ANSWER:
      Part I Line 2 Code 09. You can exclude up to ,000 of your IRA early distribution from the additional 10% tax for the purchase of a first home. So this saves you ,000 of tax.

      Here are the instructions to Form 5329, see page 3

      http://www.irs.gov/pub/irs-pdf/i5329.pdf

  8. QUESTION:
    If I take an IRA distribution in January 2007, do I report it on my 2006 income taxes?
    I need to take a distribution on my IRA in January and I will filing my taxes in January, also. Should I take the distribution after I file my taxes or will I have to file an amendment for 2006 tax year?

    • ANSWER:
      No you dont, you will report it and pay taxes if any are due for the year you received it. So if you get it in Jan 2007, you will pay tax in Jan 2008 or when ever you file.

  9. QUESTION:
    Why does putting in my cost basis on Roth IRA distribution make my refund go up?
    I am doing my brother’s taxes on Turbotax. He took a distribution from his Roth IRA last year for most of the balance (k) and received a 1099R with taxes taken out. On Turbotax, it says to put in the amount he contributed to the IRA before the distribution minus any conversions. When I input this, his refund goes up by several thousand dollars. This is making me very nervous and I don’t understand this. Please help!

    • ANSWER:
      Your brother must not be retirement age because Roth IRA distributions come out tax free.

      Anyway, you had the K distribution in his taxes – turbo tax gave you some number for the refund. Then you put in how much tax was already withheld by the brokerage company to cover the gain in his Roth IRA account. He already paid that tax – however much was withheld. So, after you plug those numbers in, his refund should grow by the amount he already paid plus any excess amount that was withheld by the brokerage company. The brokerage company will withhold 10% for the penalty, and 10% for state taxes, If you want them to, they will also withhold 10% for federal taxes as well. So if you brother’s income tax rate was less than the amount they withheld, he would be entitled to receive that back as well.
      Hope this helps.

  10. QUESTION:
    Does an IRA distribution add to income anount for consideration of EIC?
    My husband and I have two children and made just under the allowed amount for the EIC. My software is saying we are not eligible for the EIC and the only thing I can think of is we had an IRA distribution. Does the IRS use earned income plus any distribution for EIC guidelines?

    • ANSWER:
      Just so you understand what happen here – 1) IRA funds you put in are TAX exempt – but in the year when you cash your IRA (and you are not 59 1/2 or need the funds for an emergency) – you have to add that income back into your 2009 income (wages/earnings) – So then you don’t qualify for the EIC.

  11. QUESTION:
    What’s the difference between a qualified and non-qualified roth IRA distribution.?
    I have a roth ira. I want to withdraw money to pay bills. Is this considered a qualified or non-qualified distribution?

    • ANSWER:
      A qualified distribution means you have had the account for at least 5 years and have met retirement age…thus a qualified distribution has no taxes or penalties due.

      If you haven’t met retirement age (and haven’t become disabled) and don’t meet an exception, taxes and penalties *can* be owed.

      Go look at your Roth. How much of the account is from original contributions, from rollovers and lastly earnings?

      If you are taking out your contributions, there generally won’t be a tax bite. (You just can’t put the money back in.) If you are taking out rollovers that are from less than 5 years ago or are dipping into earnings, the earnings get added to income and the distribution (including the amounts rolled over) gets an additional 10% penalty.

  12. QUESTION:
    can my wife file a tax return if only income was IRA distribution?
    I normally file a joint return though my wife doesn’t have income. However last year my wife took out a distribution from her IRA and did not re-deposit it. I am wondering if we would be better off filing as Singles. I probably should run the tax program both way to see

    • ANSWER:
      You cannot file as single.

      You can try each of you as married filing separately and see what happens.

  13. QUESTION:
    Where do I reflect tax I’ve already paid on an IRA Distribution?
    I was given a forced IRA distribution, less than 0. 20% was taken out for taxes. Where on my 1040 form to I reflect this 20% tax I’ve already paid? Is it embedded in my W2 Federal Tax withholding? If not, where do I claim credit for the payment?

    • ANSWER:

  14. QUESTION:
    Would an IRA distribution be considered investment income for tax purposes?
    Ok, to clam the EIC you are allowed to have a certain amount of investment income…..I don’t know if investment income includes IRA distributions or not.
    thanks vb for answering the question that I asked =)

    • ANSWER:

  15. QUESTION:
    Tax year treatment of unqualified traditional IRA distribution?
    I know that a taxpayer has until April 15th to contribute to an IRA for the previous tax year, but does this same treatment apply to unqualified distributions? In other words, if funds are withdrawn before April 15th of 2010, would it be possible to count the withdrawal as 2009 income vs. 2010 income?

    • ANSWER:

  16. QUESTION:
    Tax on early IRA distribution?
    My wife is quitting work for good in December when we have our third baby. We’re then planning on cashing out one of her IRAs that she had at her original job to pay off our car and a smaller home loan. She now works 3 days a weeks and she’ll make about ,000 this year. Next year having quit her job she’ll obviously be making [FAQ-QUESTION]. Will it be better to cash out the IRA in January of next year or in December of this year? Will it make a difference?

    We figure we’ll need to pay about 25% in taxes plus the 10% penalty. It’s my understanding that they’ll withhold that from the distribution up front and then you just claim the total on your income taxes at year end, is that right?

    • ANSWER:
      Wait till January of next year. That way the IRA can substitute on the tax return for the ,000 that she won’t be earning. If she cashes it in in December she’d have her ,000 in wages, plus the cashing in of the ira. She’d have a double whammy. If she does it in January, then she’d only have the ,000 in wages for this year, and the ira withdrawal for next year. You also need to see if your state taxes the ira withdrawal as well. Massachusetts for example doesn’t allow a deduction on the state tax return for IRA contributions, so Massachusetts allows you to get back tax-free your original contributions and then taxes you on the excess. You should make sure with whoever is handling your wife’s ira that they take out how much you think you’ll need in taxes. If they can’t or won’t you’ll have to make up that amount some other way. But as long as you have paid in taxes for 2007 what you had for a tax liability in 2006 you won’t have any penalty if you owe for 2007 (as long as you pay the tax by 4/15/08).

  17. QUESTION:
    Is tax on an IRA distribution that is converted to a Roth considered unearned income?
    Last tax year 2009, I chose to convert 00 of my kids Traditional IRA to his Roth IRA. I understand that the 00 will be taxable to him. However, is the taxable amount considered unearned income to him and now subject to”Kiddy Tax” ?

    • ANSWER:
      Yes, it’s unearned income and subject to kiddie tax.

      If it’s not on a w-2, it’s kiddie tax–that also includes IRAs, unemployment, etc.

      He will have to file a form 1040 with an 8615 attached.

  18. QUESTION:
    I have rentsal loss, but don’t have any income except IRA distribution, can I skip the rental loss till I am r?
    I have a rental loss in several years, but don’t have any income except IRA distribution, can I skip the rental loss till I am ready to sell the property. I am living abroad and can not be back to take care the rental, so have a manager for me, but rental has loss anyway.

    • ANSWER:
      Officially, you have an NOL, but only if the amount on line 38 (AGI) goes negative. You can carry that loss backwards and forwards, though it tends to evaporate a little each year.

      Your only technique is to stretch out the depreciation over longer years…but the election to depreciate over 40 years had to be made the first year the property was placed in service.

  19. QUESTION:
    Can I still repay IRA distribution after 60 days and under age 59 1/2 & have it not taxed?
    Hi, I needed urgent money, so I got the IRA cash distribution for whole account about 8 months ago. Now things are settled, I have the following questions: 1) can I put the same amount of money back to IRA account and have it not taxed? 2) If I can put it, do I need to put it into same IRA holding company or different one? thanks.

    • ANSWER:
      1. No. An iRA is a retirement fund not a bank account you can borrow from. You also receive a 10% penalty unless you meet an exception.
      2. It’s your money. You can put it in an IRA but only IF you meet the IRA contribution rules. See Publication 590 at irs.gov or call the IRS

  20. QUESTION:
    Are the tax implications of liquidating stock more favorable than a premature IRA distribution?
    I need some cash adn I have 2 options, take some cash out of an IRA or sell some stock. I hate to do either bit which is the lesser evil?

    • ANSWER:
      Hell yes! Sell the stocks! If you’ve held them for more than one year, you’ll be taxed at the long-term capital gains rate which is 15% for most taxpayers. Even if you’ve held them for one year or less and are taxed on the gain at your marginal rate there’s no penalty involved.

      The entire distribution from a traditional IRA would be taxed plus the 10% penalty if you’re under age 59 1/2 whereas only the gain on the sale of the stocks would be taxed.

      If some of the stocks are worth less than what you paid you won’t pay any tax and may get a write off on the loss. The loss is limited to ,000 per year but any excess can be carried forward to future years until it’s used up.

      Even if you’re looking at taking the funds out of a Roth where only the gain would generally be subject to the 10% penalty the loss of the tax-free accumulation over time will greatly affect your wealth.

      Sell the stocks and leave the tax-preference items alone!

  21. QUESTION:
    Should I have 10% withheld from an rollover IRA distribution?
    I’ve rolled a significant amount of money from my 401K to a Roll-over IRA to be used as a down payment on a house. I am now ready to transfer the money from the IRA to my savings account.

    I have the option to have the 10% early withdrawal penalty withheld or not; with the following warning: “Regardless of your withholding election, you are responsible for the full payment of any federal income taxes, any state or local taxes and any penalties that may apply to your distribution. You may be responsible for estimated tax payments and could incur penalties if your estimated tax payments are not sufficient.”

    What potential penalties do I face if I elect not to withhold and put the money in an interest earning savings account until next tax season?

    • ANSWER:
      In addition to all you stated, the IRS will also penalize you for not pre paying at least 90 % of your tax for that particular year, that is the reason for withholding, so they get their share before you file.

  22. QUESTION:
    Do I have to pay Medicare or Social Security tax on an early IRA distribution?
    I am aware of the 10% penalty and the need to pay applicable federal and state income tax on the distribution, but I’m wondering about Medicare and Social Security taxes. Thanks.

    • ANSWER:
      No, you do not pay Medicare or Social Security on an IRA distribution, early or not. Same for pensions, annuities, life insurance, and other unearned income.

  23. QUESTION:
    IRA Distribution included in state tax income?
    I moved from TX to MA in April 2009 and received an IRA distribution in January 2009. Do I need to include this amount in my MA state tax income?

    • ANSWER:
      No only the state you were living when you received the income.

  24. QUESTION:
    IRA Distribution for 1st home Tax Questions?
    I pulled 15K+ out of my IRA for a down payment on a home. The account was in my name only. Can I claim all K as penalty free saying the 10K was for me and the remainder for my wife even though my wife’s name was not on the IRA account?

    • ANSWER:
      Nope.

      If she’d had money in an IRA of her own, you could have pulled up to K out of it penalty free. But the limit PER IRA is K.

  25. QUESTION:
    Took a early IRA distribution and penalty was not deducted at time of withdrawal.?
    How and where would I pay this now? Will it be taken care of when I prepare my tax return? I understand that distribution amount will be added to my taxable income, but what about the penalty?

    • ANSWER:
      You will get Form 1099-R from the IRA administrator. You will report this as income on line 15 of Form 1040. If any taxes are withheld, report on line 64 of Form 1040. You may also need to file Form 5329 to report tax on early withdrawals, excess contributions, and insufficient distributions. The additional tax is reported on Form 1040, line 60.

  26. QUESTION:
    Roth IRA distribution before age 59 1/2 is taxable income?
    I’m doing my parents taxes. My mom for some reason decide to withdraw all of the money out of her Roth IRA. Well, now on her 1099-R sent by the bank, the distribution code is a J, early distribution from Roth IRA without known exception. I know she will get penalize that 10%, however, according to the IRS Form 1040 line 15 instruction. It said that the distribution is taxable unless the code is either T or Q. So it practically saying she will get tax on her distribution & get penalize 10% on top of that. My question is, am I reading this right? Roth IRA is your after tax money that you put in, why does the distribution become taxable now? Anything she can do to minimize this situation?

    • ANSWER:
      If there are no conversions less than 5 years old, the only part of a Roth IRA Distribution that is taxable and subject to the 10% penalty are the earnings.
      If any part is a conversion less than 5 years old the portion that was taxable in the year of the conversion will not be taxable in the year of the distribution, but will however be subject to the 10% penalty for early distribution.
      Report the full amount of the distribution on line 15A of the form 1040, the earnings are reported on line 15B.
      Any penalty is accounted for on line 60 of the form 1040 and you need to complete part 3 of the Form 8606 and submit that with the 1040

      Publication 590

      http://www.irs.gov/publications/p590/index.html

      Instructions to form 8606

      http://www.irs.gov/instructions/i8606/index.html

      http://www.irs.gov/pub/irs-pdf/f8606.pdf

      UPDATE
      TO Steven F’s comment below

      See Ordering Rules for Distributions page 61 of Publication 590

      http://www.irs.gov/publications/p590/ch02.html#d0e10235

  27. QUESTION:
    I’m 59 and will start doing IRA distributions at 60. How should assets be allocated to begin distribution?
    I realize things will change over time so I’m not expecting a long range strategy. Rather, my focus is say for the first 5 years.

    • ANSWER:
      At age 60 if I were you, just leave it alone if possible.
      You should be 50% in stocks, 30% in bonds and 20%
      in cash.

  28. QUESTION:
    can I deduct taxes resulting from an early ira distribution against capital loss carry over?

    I should add to my question. If so, how do I do this? and to clarify the capital loss carry over or even 2008 capital losses are from regular taxable accounts.

    • ANSWER:
      The capital loss carryover goes on schedule D. A maximum of a 00 loss can be brought to the front of the 1040.

      The IRA distribution is reported directly on the front of the 1040.

      So if you have a loss of ,000, you’d STILL have a carryforward of 00 to the next tax year, no matter how much you took out of the IRA.

  29. QUESTION:
    Does Turbo tax report first home exception from IRA distribution?
    Last year I withdraw money out of IRA to purchase my first home. I using TurboTax to file my tax and wonder if it substract ,000 from the amount that I withdraw from taxable income since it’s used toward my first home downpayment? If it’s so, how can I check in Turbotax it’s there?

    • ANSWER:
      I used ,000 from my Roth IRA to purchase my first home in 2006 and completed my 06 taxes w/ TurboTax.

      Just answer the questions as they are presented to you. Enter the full amounts you withdrew, and then it will ask you several questions to determine whether you meet the tests to have withdrawn this money penalty free.

      It filed form 8606 for me to report this transaction, though it never actually asked me a question about being a first time home buyer.

  30. QUESTION:
    early IRA distribution- withholding tax percentage?
    I’ve had a Simple IRA for 5 years and I need to get the funds. I know that there will be a 10% penalty for early withdrawal and that I also need to pay federal tax on it as income. My question is what percentage do I need to have withheld? I know they automaticly take 10% unless you specify more. My tax bracket is 25%- is that what I should put on the distribution request? I don’t want to owe a ton at tax time or worry about underpayment penalties…

    • ANSWER:
      If you can request, request 35%. That is the 25% for the income tax, and an additional 10% for the penalty. If you have a state income tax you’ll need to save a few percent for that tax as well.

  31. QUESTION:
    what to do when the brokerage firm reported my ira as a distribution when i rolled it over to a bank?
    I wrote a brokerage check directly to the bank I deposited the sep/ira into and the bank reported the ira as a rollover and the brokerage firm reported it as a distribution. Now I must pay twice the tax. I have to pay now for the distribution and later when I get the same money out of the bank on the same money?

    • ANSWER:
      It is somewhat puzzling that you posted this as a US tax question from New Zealand. So I will assume that this is a question for USA.

      If you wrote a check from one IRA to another qualified account, just because the first reported it as a distribution does not necessarily mean it is taxable now, if it actually went to another qualified IRA within 60 days. Although, it would have been better to have done a direct transfer to remove all doubt about what you did, and to avoid any withholding. When you do your taxes, you will need to note the amount that you rolled over (or properly answer questions if you e-file). If there was any withholding and you did not add that back in from other sources within 60 days, the withholding would be subject to tax (and 10% penalty if under age 59.5).

      IRS Publication 590 at irs.gov has all the rules for US IRAs.

  32. QUESTION:
    I get a SS income yearly and a IRA traditional distribution yearly. What part is taxable?
    $l4000.SS income yearly and 00. Ira traditional distribution yearly. What is taxable?
    State of Rhode Island.
    Thank you

    • ANSWER:
      The formula for taxation on SS benefits is as follows. Take one half of the SS benefit, ,000 in your case and add that to all of the other taxable income you received during the year, ,000. For you that would be a total of ,000. The threshold for a single person is ,000 and a married couple would be ,000. Since you total is less than those thresholds your SS is not taxed. Therefore you have ,000 of taxable income. If you are single you would have a ,700 standard deduction and ,650 personal exemption. That would reduce your tax liability to zero.

  33. QUESTION:
    Is an IRA distribution considered “investment income” as defined under Earned Income Tax Credit rules ?

    To qualify for the earned income tax credit, your “investment income” must be below a certain amount. Is an IRA distribution considered to be part of this “investment income” ??
    $ so fresh – you didn’t answer my specific question.
    $so fresh – thanks for the new information.. you have now answered my question.
    vb – thanks for your excellent and very helpful answer.

    • ANSWER:
      On 1040a, an ira distribution is shown on line 11 *and* line in the agi on line 21.

      In the 1040a instructions, the investment income worksheet specifically skips line 11.

      However, the calculation of the EIC takes the agi into account, so a large amount of IRA money can lower the EIC (it would never raise it).

  34. QUESTION:
    At what rate is SEP IRA Distribution taxed?
    I want to take a little money from my SEP IRA account for an emergency. I am willing to pay the 10% penalty but they say I will have to pay additional taxes at the end of the year. I’m just wondering what is the tax rate for these things does anyone know?

    • ANSWER:
      Your marginal tax rate. If you are in the 28% bracket you will pay 38% Federal plus any state tax / penalty where you live.

  35. QUESTION:
    How do I take my distribution out of IRA account with out paying penalty?
    I am a sole-proprietor of a small business corporation (applied for S-corporation election for 2006). I have made a contribution to business retirement account for 2006. After making the contribution, I realized that S-corporations can not make contributions to SEP-IRA.

    Now I have to take the distribution out of my IRA. Is there any way to do this with out getting fined by IRS for early withdrawal.

    -thanks

    • ANSWER:
      If it shouldn’t be there to begin with, you will only get penalized if you don’t take it out.

  36. QUESTION:
    I have a question regarding the IRA Early distribution to pay for costs associated with buyin your first home.
    We closed on the home two weeks ago. My question is this, now that I know about this rule, can I take the distribution to reimburse myself for the closing costs and not be penalized for the early distribution?

    • ANSWER:
      As long as it happens within the same calander year, yes.

      Remember, assuming that it is a Traditional IRA, you will still pay taxes on the withdrawl, but no 10% penalty. Also, the limit is ,000 and it must be for a 1st time home purchase (The IRS defines 1st time home purchase as having not owned a home in the previous 2 years).

  37. QUESTION:
    what is the formula for calculating my required minimum distribution on the IRA I inherited?
    I inherited an IRA when my brother died. I told the brokerage firm managing that IRA that I wanted the lifetime option rather than the 5-year option for taking the money out of the IRA but I have no idea how to calculate the minimum distribution amount that I’m supposed to take out every year. I know there must be a formula or something and I can’t afford a tax lawyer.

    • ANSWER:
      First, I’m sorry for your loss of your brother.

      With respect to your question; it’s easy. If you were listed as a designated beneficiary on his IRA, your first year’s RMD (required minimum distribution) must be taken by Dec 31 of the year after the IRA owner’s death. You look up how old you’ll be on your b-day during that calendar year on the Single Life Expectancy table and divide the prior year-end balance by the divisor pertaining to your age.

      http://personal.fidelity.com/products/retirement/inheritedira/lifeexptable.html

      So, if you were 48, for example, the divisor is 36. If the prior year-end balance was ,000, you’d need to withdraw ,000 (,000 divided by 36). Each subsequent year you reduce your initial life expectancy by 1 (1/35th, 1/34th, etc.), and perform the same calculation.

      The IRS penalty for failing to remove your RMD is 50% of the shortfall.

      Hope that clears it up for you.

      DON’T FORGET to name new beneficiaries to your inherited IRA; they will be able to continue your RMD schedule in the event of your premature death.

      DISCLAIMER: While the information in this response was obtained from sources believed to be reliable, its accuracy and completeness cannot be guaranteed. The opinion voiced in this answer is for general information only and is not intended to provide specific advice or recommendations for any individual. Questioners are urged to consult with their professional advisers before making any decisions regarding their finances.

  38. QUESTION:
    Taxes on Early Distribution of Roth IRA Principal?
    I’m considering a case where the holder of a Roth IRA is less than 59 and no other “early distribution exception” applies. I’ve heard that the principal added to a Roth IRA can be withdrawn at any time without penalty. Is this true? Can someone please explain how this would work and point to appropriate IRS documentation?

    Obviously earnings from the Roth IRA would be taxed and penalised.

    Does the (principal) money need to be in the Roth IRA for at least 5 years?

    Is there a 10% tax on early withdrawal of principal?

    Thanks,

    • ANSWER:
      Here is a site with a very useful chart on the various IRA withdrawal scenarios

      http://www.rothira.com/disttax.htm

      The IRS link covers the details.

  39. QUESTION:
    RMD Distribution from IRA – How should I correct?
    I took my entire RMD distribution from my IRA. I should have taken part from my IRA and the equivalent part from my Annuity. How can I correct this, or do I not have to worry?

    Thanks.

    • ANSWER:
      RMDs do not apply to annuities unless the annuity is an IRA.

      If it is an IRA, include the value with all IRAs (not Roth) and divide by the applicable divisor from the IRS table to determine your RMD for the year. You need not withdraw from each IRA to satisfy your RMD, you need only satisfy the amount.

      Hope that helps.

      PLEASE VOTE to avoid a TIE. On behalf of all of your responders, who take the time and effort to help questioners in this free Yahoo! community, THANK YOU in advance for taking the time to choose your “Best” Answer. We really appreciate it.

      DISCLAIMER: While the information in this response was obtained from sources believed to be reliable, its accuracy and completeness cannot be guaranteed. The opinion voiced in this answer is for general information only and it shall not be construed as tax, legal, or investment advice for any individual. Questioners are urged to consult with their professional advisers before making any decisions regarding their finances.

      Retirement Guru, CFP®, EA
      Certified Financial Planner™ Practitioner
      Enrolled Agent | Admitted to Practice before the IRS

      ‘Providing sound Retirement and Estate Planning Strategies since 1985′

  40. QUESTION:
    Can I still repay IRA distribution in 60 days AFTER age 59 1/2 & have it not taxed? Repay to same plan.?
    I need 00 for a real estate closing, and am over 59 1/2. I can replace the 00 to the IRA account within 60 days. I can’t tell if a rollover still applies when I intend to put the money back to the same account it came from.

    • ANSWER:
      You can still do a rollover after age 59-1/2.

  41. QUESTION:
    Is withholding a % for Federal Taxes of Roth IRA Early Distribution Required?
    Would it be permissible to not withhold ANY taxes upon an early retirement distribution and simply pay the appropriate amount of taxes during the next Estimated Tax payment (including taxes due and penalties associated with the early distribution)?

    For a planned early retirement distribution that will receive the 10% early distribution penalty, is there a required federal withholding % upon actual distribution?

    This individual is currently planning to pay quarterly Estimated Taxes and that is when ALL estimated taxes and penalties related to this distribution will be made.

    • ANSWER:
      No. When a taxpayer fills out a withdrawal form, he or she “elects” how much tax to withhold, if any. In fact, there’s usually a line item with a box to check indicating “Do NOT withhold Federal taxes.”

      Remember, the potential tax and 10% early-withdrawal penalty applies only to the earnings, if any. Roth contributions (not conversions) may be withdrawn anytime, without tax or penalty.

      Hope that helps.

      PLEASE VOTE to avoid a TIE. On behalf of all of your responders, who take the time and effort to help questioners in this free Yahoo! community, THANK YOU in advance for taking the time to choose your “Best” Answer. We really appreciate it.

      DISCLAIMER: While the information in this response was obtained from sources believed to be reliable, its accuracy and completeness cannot be guaranteed. The opinion voiced in this answer is for general information only and it shall not be construed as tax, legal, or investment advice for any individual. Questioners are urged to consult with their professional advisers before making any decisions regarding their finances.

      RetirementGuru, CFP®, EA
      Certified Financial Planner™ Practitioner
      Enrolled Agent | Admitted to Practice before the IRS

      ‘Providing sound Retirement and Estate Planning Strategies since 1985′

  42. QUESTION:
    can someone in distribution of an IRA take advantage of the new rule to deposit a tax refund to the account?
    If one is in required distribution, can they still direct deposit their tax refund to that account? The new option seems to make sense for other IRA’s like the Roth but I didn’t think it was possible to make a contribution to a traditional if you are in distribution. I know someone who is planning on taking advantage of the new option and I wondered if it won’t cause a problem later.
    If the bank allows it (how could they stop it if the account number is valid?) is there a correction that can be made later?
    Any help would be appreciated

    • ANSWER:
      A taxpayer who is required to take a minimum distribution from an IRA has reached the age of 70.5. After age 70.5, no additional contributions to a traditional IRA are allowed.

      The IRS is allowing taxpayers who receive a refund on their tax return to deposit refund money into their IRAs. However, this does not change the rule that taxpayers over the age of 70.5 may not contribute to a traditional IRA.

      A taxpayer over the age of 70.5 may contribute to a Roth IRA, and if the taxpayer had a refund, it may be deposited (in full or part) to the Roth IRA.

      If a taxpayer who is not allowed to contribute to a traditional IRA makes a contribution anyway, the contribution will be treated as an excess contribution subject to a 6% annual excise tax for each year that excess contribution remains in the account.

  43. QUESTION:
    is a ira distribution on death to beneficary taxable or not?

    • ANSWER:
      Yes, when the funds are withdrawn – it doesn’t work the way other items inherited do where the basis is stepped up to the value at the time of death – that’s because the money was put in pre-tax.

  44. QUESTION:
    Qualified Educational Expenses & Early IRA Distribution Penalty?
    IRS publications mention that early distributions from IRAs used to pay qualified educational expenses may escape the 10% penalty (although normal taxes still must be paid).

    Does anyone know if the penalty may still be avoided if paying off student loans, rather than paying current year tuition & fees?

    I have parent “plus” loans in my name, as well as consolidated staffords and a private loan in my daughter’s name, which I am paying.

    • ANSWER:
      No. The distribution has to be used to pay qualified educational expenses (i.e. tuition). Paying off student loans do not qualify. Therefore you would be subject to the 10% penalty.

  45. QUESTION:
    what is the penalty for withdrawl from an inherited IRA/early distribution?
    I am wanting to close my deceased fathers’ IRA to invest in property. I want to know how tis will affect my taxable income.

    • ANSWER:
      Does this help?

      http://en.allexperts.com/q/Tax-Law-Questions-932/IRA-benificiaries-cash.htm

  46. QUESTION:
    State Tax on IRA distribution – Not stayed in CA in that year?
    Do I need to file CA state tax – here is my situation:
    - I took some Early IRA distribution
    - I was out of USA for the whole year, so not stayed in CA for that year.
    - Have filed Federal taxes.
    - Prior to that I was living in CA and now back to CA
    - I’m US permanent resident

    CA tax instructions say that you may have to file CA taxes even if you have not stayed in CA for that year if there is an income from CA source. Does the IRA distribution will be considered income from CA source?

    • ANSWER:
      “CA tax instructions say that you may have to file CA taxes even if you have not stayed in CA for that year if there is an income from CA source.”

      This is correct. There is a famous court case. The FTB (CA tax authority) won the case against a CA resident living in Vietnam all year long.

      “Does the IRA distribution will be considered income from CA source?”

      This is Publication 1031: 2006 Guidelines for Determining Resident Status

      http://www.ftb.ca.gov/forms/06_forms/06_1031.pdf

      A resident is any individual who is:
      • In California for other than a temporary or transitory
      purpose; or
      • Domiciled in California, but outside California
      for a temporary or transitory purpose.
      A nonresident is any individual who is not a resident.
      A part-year resident is any individual who is a California
      resident for part of the year and a nonresident for part of
      the year.
      The term “domicile” has a special legal definition that is not the same as residence. While many states consider domicile and residence to be the same, California makes a distinction and views them as two separate concepts, even though they may often overlap. For instance, you may be domiciled in California
      but not be a California resident or you may be domiciled in another state but be a California resident for income tax purposes. Domicile is defined for tax purposes as the place where you voluntarily establish yourself and family, not merely for a special or limited purpose, but with a present intention of making it your true, fixed, permanent home and principal establishment. It is the place where,
      whenever you are absent, you intend to return.

      In other words, you could live outside of the US all year long and be a Californian.

      Of course the FTB have several ways to test you:

      Amount of time you spend in California versus amount of time you spend outside California;
      • Location of your spouse and children;
      • Location of your principal residence;
      • Where your driver’s license was issued;
      • Where your vehicles are registered;
      • Where you maintain your professional licenses;
      • Where you are registered to vote;
      • Location of the banks where you maintain accounts;
      • Location of your doctors, dentists, accountants, and
      attorneys;
      • Location of the church, temple or mosque, professional
      associations, or social and country clubs of which you
      are a member;
      • Location of your real property and investments;
      • Permanence of your work assignments in California;
      and
      • Location of your social ties.

      These are some of the things that the FTB look for. Especially, if you file your CA tax return every year and there is one missing. That will be the red flag to them. Usually, you will get a letter in the mail explaining the situation within 2 years from the due date.

      (See the publication about safe harbor rule. There maybe a way out of CA taxation.)

      **********************************************

      Nonresident/part year resident of CA booklet

      http://www.ftb.ca.gov/forms/06_forms/06_540nrbk.pdf

      Nonresidents of California Receiving a California Pension California does not impose tax on retirement income attributable to services performed in California received by a nonresident after December 31, 1995.

      or

      http://www.ftb.ca.gov/forms/06_forms/06_1031.pdf

  47. QUESTION:
    Does an IRA distribution affect ones Social Security?
    If I am collecting SS will I be penalized if I take a distribution that totals more than I recieve from SS?

    • ANSWER:
      It will not affect the amount of SS that you receive. However, it may affect whether you must pay income tax on your SS benefits.

  48. QUESTION:
    When you take a tradtional IRA distribution at age 61, do you pay State taxes on it or just Federal?
    I live in New York state.

    • ANSWER:
      Up to ,000 per year of a traditional IRA distribution from an IRA which was established from your earnings before you retired is exempt from NY State tax. This is assuming you do not have additional private pensions (the total exemption is ,000).

      Any amount over that is added to your NY taxable income.

  49. QUESTION:
    Is there any way to take a 401K or IRA distribution without penalty if you are below the minimum age?
    To pay Real estate taxes and Homeowners Insurance. I lost my job and I can pay my mortgage and other bills, but taxes and insurance are killing me

    • ANSWER:
      I recently had to withdraw money from my IRA due to a medical hardship. The burden of proof rests with me to prove to IRS that there existed such a hardship.

      Check with who manages your plan to see what documentation if any they will need for your particular situation.

      Good luck.

  50. QUESTION:
    NJ State tax question: I took a ,000 early IRA distribution in 2007..is it reportable on my NJ taxes?
    I took a small distribution in 2006, but my accountant didn’t show it on my 2006 tax return…since I am doing my own 2007 taxes, I was sure it was reportable.

    • ANSWER:
      Its income so its reportable.