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Hi

I have been on the 401K Board and was directed here. The whole string is at: http://boards.fool.com/ira-mistake-29535043.aspx


And here is the last reply:

>> In order to maintain the tax free status of the transfer, it must be transferred to another IRA account. But that account can be at a discount broker allowing you to buy and sell stocks or mutual funds at will.

If the funds are transferred to a regular account, first they will take withholding, and you will pay income taxes on your gains and pay a 10% penalty. That is the expensive way. Keep it in an IRA.

Transfer to a regular account counts as a distribution. Partial distributions will be credited with a portion of the non-deductible contribution. A full distribution will be credits with all of it. But you will still pay a 10% penalty on the distribution.

If the account investments are worth less than your contribution, there may be a way to cancel the original contribution. For information on that aspect ask on the Tax Strategies board. They are the experts.<<




I did fail to mention that I am over 60, so no 10% penalty. The account has gained just under $3K on $22K in contributions, so I assume I would be looking at taxes on the gains. Basically, I just want to get this into an individual, non tax advantaged account where I can utilize some more complex option strategies.

Do I have the tax implications correct? Is there a trick to how to file my taxes next year to reflect only the gain and not the total amount?

Thanks
JIm
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If the IRA is your wife's, it is her age and not yours that matters.

You did file an 8606 to establish the cost basis? As long as the cost basis is established, the distribution with the associated cost basis is reported on your tax return. It isn't a "trick", it just needs to be properly reported.
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My Wife is over 60 as well. In a quick review of my old tax returns, it appears that I filed a 8606 in 3 of the 4 years I made non deductible contributions. Do I understand that I would have to pay a penalty (I think I read $50, but I am not sure) for any year I failed to file a 8606?
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In a quick review of my old tax returns, it appears that I filed a 8606 in 3 of the 4 years I made non deductible contributions. Do I understand that I would have to pay a penalty (I think I read $50, but I am not sure) for any year I failed to file a 8606?

To get all the facts in one place:

Your wife has a traditional IRA which is worth about $25,000 and has $22,000 of nondeductible contributions, most of which have been properly reported on Form 8606. She is over 59 1/2 and wants to move these funds to a taxable investment account.

We're almost to the point that we can answer your question about the tax consequence of this move, but there's still one piece of missing information. Does she have any other traditional IRA accounts, including SEP, SIMPLE, and rollovers from employer plans?

As for the missing 8606, what tax year is it for, and where does it fall in the sequence of years contributions were made?

Phil
Rule Your Retirement Home Fool
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Do I understand that I would have to pay a penalty (I think I read $50, but I am not sure) for any year I failed to file a 8606?

Technically, yes, the IRS specifies that you'd be responsible to file an updated form 8606 and be assessed a $50 penalty. Now, I haven't done this myself, and will defer to any other tax preparers here who have, but I've heard from my tax-prep friends that with a simple letter of explanation accompanying an updated 8606, the IRS will waive the $50 penalty. But you want to get this updated, else you'll be paying tax twice on the after tax contributed dollars...something most individuals try to avoid doing.

BruceM
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This is great help.

My wife has no other accounts, IRA or otherwise.

The missing 8606 was for 2009, which was the last of the four consecutive years of non-deductible contributions.

Jim
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My wife has no other accounts, IRA or otherwise.

The missing 8606 was for 2009, which was the last of the four consecutive years of non-deductible contributions.


Amend your 2009 return to include the 8606. This won't change any numbers on your return or increase your tax. I've never heard of IRS assessing the $50 penalty in cases like this. This will bring your after-tax reported basis current.

Assuming you do the distribution in 2011, include Form 8606, Part I to calculate the taxable portion, which will be anything in excess of the after-tax contributions.

Phil
Rule Your Retirement Home Fool
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One more (hopefully last on this subject) question. Since I have $22K in non deductible contributions and approximately $3K in appreciation in this account, can I pull out the $22K and leave the $3K in and avoid taxes?

I recently joined Motley Fool Pro but am hampered in trying to follow all the recommendations because most of my money is in two IRAs and a 401K in my name. I would take the $22K a put it into an individual account I already have in my name or open one in my wife's name.

Again, my rationale is to get the $22K into an individual account where I can avoid the option strategy restrictions that come with an IRA.

Jim
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One more (hopefully last on this subject) question. Since I have $22K in non deductible contributions and approximately $3K in appreciation in this account, can I pull out the $22K and leave the $3K in and avoid taxes?

No, the cost basis is pro-rated.
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Again, my rationale is to get the $22K into an individual account where I can avoid the option strategy restrictions that come with an IRA.


what sort of options?
what sort of restrictions?

might be a Broker thing that you could get around by changing broker.. and that might be better than pulling money from IRA
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Since nobody has asked- what does the wife think about all of this? If she has no opinion, that's
even more worrisome.
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Thanks vkg. So the only option in removing money from this IRA is to take out the entire $25K and take the tax hit on the $3K

Ox6a74: I am talking about Option trades that require a margin account like shorts, spreads, naked calls, synthetic shorts and writing puts. I don’t think they are possible in any IRA, but if you know of a broker who does allow, please let me know

Hohum777: While I should have not spoken in the first person, the truth of the matter is that investing is something that we both agreed should be my responsibility. Not because my wife in not smart enough---far to the contrary---she was the magna cum laude in college and holds a Masters degree in Early Childhood Development, but numbers are not her forte. I barely made the Deans List in Pharmacy school, but did do well enough to get my Masters of Science in Health Administration. It works for us. I'm sure no offense was intended, and none taken.

Thanks to all three of you.
Jim
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Ox6a74: I am talking about Option trades that require a margin account like shorts, spreads, naked calls, synthetic shorts and writing puts. I don’t think they are possible in any IRA, but if you know of a broker who does allow, please let me know


ok. i don't.

sounds like what my broker calls Levels 2 and 3 .. they only allow level 0 and 1 in IRA ... i don't know whether the rules are IRS or broker determined. (when i first started messing with options, i was told NO options in IRA ..somewhere since, the story changed)
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