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Author: Debbie753 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121599  
Subject: IRA distribution mess Date: 2/9/2001 7:39 AM
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Please help. I'm confused. What happens if several years ago contributions were made to a traditional IRA account but never deducted on the tax returns? It's been over 4 years so I guess it's too late to ammend them. Now my mother (age 63) withdrew the funds and they appear to be fuly taxable as current income. This equals double taxation on the money ($12,000). Right? No withholding. On top of that they may have not been originally fully deductible because she was employed in a retirement/pension plan position. I need to get back years info and check the limits. She doesn't remember when she made the deposits and for how much. Would the bank have a history going back maybe 10 or so years with deposits and interest? I'm panicked now but to me it looks like maybe 28% of $12,000 plus fine for not enough withholding = 3 or 4K
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Author: Debbie753 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46014 of 121599
Subject: Re: IRA distribution mess Date: 2/9/2001 7:40 AM
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Thank you for any and all help.

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Author: euphoriant Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46021 of 121599
Subject: Re: IRA distribution mess Date: 2/9/2001 8:37 AM
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What happens if several years ago contributions were made to a traditional IRA account but never deducted on the tax returns? It's been over 4 years so I guess it's too late to ammend them.

If it's too late to amend the return, then you lost the deduction (or your grandmother lost the deduction).

Now my mother (age 63) withdrew the funds and they appear to be fuly taxable as current income. This equals double taxation on the money ($12,000). Right?

I think that the principal when withdrawn is not taxable, even if it wasn't deducted (or deductible). Please read the IRS publication because I think you will find this very helpful. I'm sorry that I don't know the rules better, but I don't think you're out of luck.

Would the bank have a history going back maybe 10 or so years with deposits and interest?

I believe they do, but please keep in mind that they will charge you for this service.

Good luck and visit the IRS website for the publication (sorry I don't know the pub #s).

e

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Author: teedup1 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46024 of 121599
Subject: Re: IRA distribution mess Date: 2/9/2001 9:41 AM
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I don't know much, but do know:

- Any amount withdrawn from a Traditional IRA, including the principal, is fully taxable as ordinary income in the year the distribution is made/taken.

- Amended tax returns can still be filed for year '97, '98, and '99 income until 4/15/2001.

(Oh man, we need EXRoPhil!)

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46048 of 121599
Subject: Re: IRA distribution mess Date: 2/9/2001 1:48 PM
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teedup1 wrote:

- Any amount withdrawn from a Traditional IRA, including the principal, is fully taxable as ordinary income in the year the distribution is made/taken.

I reply:

This is incorrect. Any contributions which were made with after tax dollars (non-deductible in the year of contribution) are not taxed when they are withdrawn from the IRA. That's why non-deductible contributions are reported on Form 8606. The procedure is to take the total amount of your non-deductible contributions divided by the total value of your IRA on 12/31 of the year before the distribution and multiply by the value of the distribution. The "answer" you get is the amount of the distribution that is tax-free.

Ira

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Author: teedup1 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46092 of 121599
Subject: Re: IRA distribution mess Date: 2/9/2001 9:13 PM
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I stand corrected (for making an incorrect assumption of only 'before tax' contributions in this case). Thank you, Ira.

Winni

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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46101 of 121599
Subject: Re: IRA distribution mess Date: 2/9/2001 10:34 PM
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Please help. I'm confused. What happens if several years ago contributions were made to a traditional IRA account but never deducted on the tax returns? It's been over 4 years so I guess it's too late to ammend them. Now my mother (age 63) withdrew the funds and they appear to be fuly taxable as current income. This equals double taxation on the money ($12,000). Right?

As Ira noted in an earlier response, nondeductible contributions are not taxed again upon withdrawal from the IRA. Your problem is that it appears that the rules for reporting nondeductible contributions were not followed.

If one can make deductible contributions to an IRA, one can choose not to deduct those contributions. However, one is supposed to file Form 8606 to report those nondeductible contributions and, thus, establish the basis in the traditional IRA. I don't know whether this is a formal "election," a term of art in tax law, which requires an entry on a return.

I think I'd be willing to take a shot at treating your mother's undeducted contributions as if they had been properly reported, assuming that they can be proved with copies of her returns showing no deductions. I don't know whether the issue has ever been litigated, but I do know that to do so would leave the government in no worse position that it would be had the contributions been properly reported.

If there is a basis of undeducted contributions to a traditional IRA, the taxable portion of any distribution is computed in Part I of Form 8606.

Phil Marti
VITA Volunteer

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Author: sonny36 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46507 of 121599
Subject: Re: IRA distribution mess Date: 2/15/2001 8:09 AM
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There are other tax message boards that you should post this question to:

www.irahelp.com
www.fairmark.com
www.msn.com and then go to the tax message board.

The first two are very good and have professional people responding to your questions. I use them all the time for questions.
glenn

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