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Author: scrooge2 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121323  
Subject: IRA-Taxability of Withdrawals Date: 7/13/1999 11:05 PM
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I've looked through the FAQ for this site but haven't found anything that would answer my question.

Beginning in 1977 and continuing through 1989, I made voluntary contributions to my money purchase pension plan and/or to my profit sharing plan. In 1998, I converted these plans to a regular IRA. As it stands presently, the voluntary contributions amount to 4.27% of the market value of my IRA.

Beginning this year, I start withdrawals from my IRA. Fidelity will send the IRS a 1099 after the end of this year showing the amount of my withdrawals. I assume I will report on my individual return 100% of the amount shown on form 1099. QUERY: (a) where do I deduct the 4.27% for the amount that was a voluntary contribution, (b)Will the IRS just accept my statement as to what I contributed as voluntary contributions, and (c) Of course the percent each year will be different. Do I just recalculate the percent each year and use that?

Thanks in advance for your considered replies!
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Author: zorloc Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17301 of 121323
Subject: Re: IRA-Taxability of Withdrawals Date: 7/14/1999 11:21 AM
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Was the 4.27% that was a voluntary contribution taxed? Probably not, and in that case you have to pay taxes on the full amount.

jbw

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17360 of 121323
Subject: Re: IRA-Taxability of Withdrawals Date: 7/15/1999 7:39 PM
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[[Beginning in 1977 and continuing through 1989, I made voluntary contributions
to my money purchase pension plan and/or to my profit sharing plan. In 1998, I
converted these plans to a regular IRA. As it stands presently, the voluntary
contributions amount to 4.27% of the market value of my IRA. ]]

As zorloc points out, it is likely that these voluntary contributions were "pre-tax" contributions. If so, they were never subject to tax, and will be subject to tax when you tade the distributions from your IRA account.

If you tell me that these voluntary contributions were AFTER TAX...then you have an entirely new set of problems. If they were truely after tax contributions, they were NOT available to be rolled over to an IRA account...they would have been required to be removed from the other funds when you make your IRA rollover/transfer. So if they WERE after tax, and you transferred them to an IRA account, you have a bunch of other problems.

[[ Beginning this year, I start withdrawals from my IRA. Fidelity will send the IRS a
1099 after the end of this year showing the amount of my withdrawals. I assume
I will report on my individual return 100% of the amount shown on form 1099.]]

I believe that you are quite correct.

[[ QUERY: (a) where do I deduct the 4.27% for the amount that was a voluntary
contribution, ]]

You likely don't. I would guess that it was a pre-tax contribution, and it was never included in your W-2 wages, and you never paid taxes on it initially...which is why you owe them now.

[[(b)Will the IRS just accept my statement as to what I contributed
as voluntary contributions, and ]]

Again...I believe that this is now a moot point.

[[(c) Of course the percent each year will be
different. Do I just recalculate the percent each year and use that?]]

Again, I believe that this point will also be moot. You can likely expect to owe taxes on 100% of your distribution UNLESS you have basis in your IRA by making any non-deductible IRA contributions.

TMF taxes
Roy

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Author: scrooge2 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17364 of 121323
Subject: Re: IRA-Taxability of Withdrawals Date: 7/15/1999 8:05 PM
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TMFTaxes:
Thanks for your reply (17360).
My voluntary contributions were after tax contributions. Of course, they have already been subjected to tax.

The rollover occured on 12-31-98. Dumb me, I didn't realize I couldn't rollover that part of my pension plan that consisted of voluntary contributions that had already been taxed.

I assume I now withdraw from my IRA the amount consisting of "voluntary contributions". Then Fidelity will send a 1099 at the end of the year to the IRS showing this withdrawal. Seems like I'm bound to pay taxes again on this amount. Or, is there a way out?

Thanks for your sound advice.


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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17371 of 121323
Subject: Re: IRA-Taxability of Withdrawals Date: 7/15/1999 8:51 PM
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[[ My voluntary contributions were after tax contributions. Of course, they have
already been subjected to tax.]]

You REALLY need to double check this issue. Most 401k contributions are PRE TAX. If your's were not, you are in the unusual minority. In addition, if you had after tax contributions, your 401k administrator would generally have notified you of that fact, and would have REFUSED to transfer those after tax contributions to your new IRA. In fact, even if you were given an actual check, the 401k administrator would normally give you TWO checks...one representing your post tax contributions (not eligible for rollover), and another one for the remainder of the fund.

So all indications point to PRE tax contributions. But I can't look at your prior payroll stubs and 401k statements...so I can't really know for sure. But it sure may be worth a call to your prior employer.

[[ The rollover occured on 12-31-98. Dumb me, I didn't realize I couldn't rollover
that part of my pension plan that consisted of voluntary contributions that had
already been taxed.]]

Again, generally the 401k administrator ADVISES you of that fact...and in many cases will REFUSE to transfer those funds to a IRA rollover account. Which, again, leads me to believe that your contributions were PRE tax.

[[ I assume I now withdraw from my IRA the amount consisting of "voluntary
contributions". Then Fidelity will send a 1099 at the end of the year to the IRS
showing this withdrawal. Seems like I'm bound to pay taxes again on this
amount. Or, is there a way out?]]

If you find that these contributions were, in fact, after tax contributions, they are treated as "excess" contributons...and you'll be required to pay a 6% penalty on those contributions for each and every year they were in your IRA. In addition, you are now required to remove those contributions and the associated earnings from the IRA account. The "principal" should be received by you tax free, but you'll owe taxes (and potentially penalties) on the earnings of the excess contributions.

So there is certainly a way out...but it'll take some work. And, by virtue of the fact that you ORIGINALLY rolled over the entire amount, Vanguard considers it all taxable. So when you remove the "excess", Vanguard will report it as all taxable. And when you report the transaction on your tax return, it'll look very odd when you don't pay taxes on the original contributions, and your return may be subject to question by the IRS.
It will be THEN that you'll have to prove to Uncle Sammy that your contributions were AFTER tax. So you better be completely, 100% correct from the git go.

Which is why I would make double damn sure that your contributions were in fact after tax. I'd bet you dollars to donuts that they were pre-tax...which would make your life a whole lot easier anyway.

Hope this helps...
TMF Taxes
Roy

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Author: scrooge2 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17372 of 121323
Subject: Re: IRA-Taxability of Withdrawals Date: 7/15/1999 9:29 PM
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TFMTaxes:
Thanks again for your response (17371).

I was a one man corporation. I was the plan administrator. We were allowed to make voluntary (after tax) contributions, over and above the employer contributions, from around 1978 to 1989. After making 25% contributions (total-by employer) to the profit sharing plan and the money purchase pension trust, I personally contributed an additional 10% voluntary after tax contribution.

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17396 of 121323
Subject: Re: IRA-Taxability of Withdrawals Date: 7/16/1999 7:05 PM
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[[ I was a one man corporation. I was the plan administrator. ]]

Oops...then I guess you are correct. You have nobody but yourself to blame. That being the case, your only option is to remove the post-tax contributions and earnings, pay the penalties under the excess contribution rules, and be prepared to fight with your brokerage firm and the IRS to try and get it all straightened out.

It'll be a long, long road. Good luck.

TMF Taxes
Roy

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