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RE: IRA Tax

My wife, when she retiured in 2006, rolled over her IRA into a bank sponsered IRA. She invested $15,600 +/- at the time and was charged a 5 1/4% commision so her actual investment was $14,800 +/-. In mid-2010, we rolled her IRA into a brokerage sponsered on which was valued at $15,600 and is now valued at $14,400.We're doing some estate planning and are thinking of cashing her IRA out (she's 73 and I'm 69) Her" investment," ( $15,600-$14,400=$1200 loss) is showing a loss. Can this loss be captured as a loss? Or is her loss actually $14,800-$14,400=$400 or something else? R. Wink
Reply to
rwwink
Most IRAs are funded with pre-tax money, which means that their entire value is taxable at the time of withdrawal. That's the case even if you lost money on the investments you purchased in the IRA. For example, if the account was funded with contributions totaling $20,000, and it's now worth $14,400, and you withdrew the entire amount, you'd have $14,400 in taxable income and no losses to declare anywhere. The reason is that the original $20,000 had never been taxed.
It's possible you had after-tax contributions to the IRA, or to a retirement plan that was rolled over into the IRA. In that case, if you fully liquidated the IRA you could end up with net losses that would be listed on your tax return as a miscellaneous itemized deduction. That'd be unusual, but it's possible. Investopedia has a decent article on this topic:
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In general, you rarely want to cash out an IRA entirely given the income tax that results.
-Tad
Reply to
Tad Borek
If she took an income tax deduction when funding the original IRA (the usual case) and cashes in the IRA, then she will receive a 1099-R from the bank showing a distribution of $14,400, which will be taxable in the tax year in which the distribution occurs.
If she didn't take the deduction, then she should have filed Form 8606 in each year she funded the IRA, establishing the basis as the total of her contributions. Then she would reconcile the 1099-R with the last Form 8606 to determine the taxable amount.
One question: Has she been taking the required minimum distributions since she turned 70-1/2? If not, there may be penalties due. Before paying the penalties, I would appeal to the IRS to forgive the penalty. See IRS Publication 590
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for details.
Dave
Reply to
Dave
She will have to withdraw a required minimum distribution each year or pay a penalty. If she hasn't done so, get some professional advice.
Whatever she withdraws from the IRA will be subject to income tax. I you're in a low tax bracket, liquidate the IRA and pay the tax.
You could convert to a Roth which doesn't require a minimum distribution, buy you would need to pay the taxes all at once.
--
   Ron
Reply to
Ron Peterson
To answer some of this and to complicate it further: When the IRA was first established, it was funded 50/50 by her first employer contributions then 100(her)/0(employer) by her second employer which is where she retired from. So the real investment is about 25% pretax (her contributions), 25% matching employer contributions and 50% aftertax dollars. It's been unfunded forthe last 8 yeaars and she's been taking the minimum distributions for the last couple orf years. When she retired, she put the funds into Franklin Funds (recommended by the bank and against my wishes) where the amount went from $15,600-5 1/4% commission to about $13,800. We added about $2,200 from a different saving (after tax) account and rolled it out of Frainklin to a different fund. As far as I can find, she's never gotton any forms from anyone on this account except what we've been doing the last couple of years. R. Wink

Reply to
rwwink
Employer contributions are also pretax so I don't see where you get the 50% in aftertax dollars you mention above. If you mean the growth in the account since those contributions were made, that is also pretax money.
The only part you've mentioned that seems a candidate for an after-tax contribution is the $2,200. What matters isn't where the cash came from, but rather whether the contribution netted you a tax deduction on that year's income tax return. Normally it does; that's called a deductible contribution. If it doesn't, though, you file a Form 8606 that establishes it as a non-deductible contribution, which gives you basis in your IRA (a portion that isn't taxed at withdrawal). So if you have them, dig up the old tax returns and see.
-Tad
Reply to
Tad Borek

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