Q: I have retirement pension and SS income, but I also made some money working last year. Can I contribute to an IRA and get a tax benefit?

A: Yes, if you were under age 70 1/2 at the end of last year.

Q: Are the reinvested dividends and long and short term capital gains from an IRA or 401K taxable?

How about gains if we buy and sell funds or if the funds go up in value?.

How about losses if we buy and sell funds or if the funds go down in value?

A: No, nothing that happens inside an IRA/401K has any tax consequences.

The only time taxes might be due on an IRA is when you make a withdrawal. That withdrawal amount is all then considered taxable income, unless your IRA was funded in part with after tax contributions.

Q: I withdrew all the funds from my IRA and later deposited the amount into another IRA at another bank within the required 60 day period. I received a 1099R from the IRA I closed. How do I report this on my taxes?

A: As you closed your account, the trustee would have had to withhold income tax from your withdrawal.

If you deposited the gross amount (the amount before any withholding) into another IRA account within the 60 day period you have a tax free rollover.

If you only opened the new IRA using the net amount of the IRA withdrawal, then the amount of tax withheld that you did not redeposit, becomes taxable income to you.

You report the gross distribution on Line 15a of Form 1040. You report the taxable amount on Line 15b. If this was a tax-free rollover, then your taxable amount would be zero.

Be sure to write the word "Rollover" on Line 16 in either case.

Q: If one is over 70 1/2 and receiving the mandatory distribution from an IRA and does not have any earned income, can any of the amount be converted into a Roth after paying taxes on said distribution?

A: Yes, you may still convert an IRA to a Roth IRA even though you are receiving your RMD as long as your modified AGI is $100,000 or less. Note, that you must first take your annual RMD. You can not convert the RMD.

See IRS Pub 590 for the definition of modified AGI. The amount of earned income you have is not relevant for conversions of an IRA to a Roth IRA.

Q: I have a traditional IRA with a cost basis from non-deductible contributions. When I decide to take my first distribution can I take all of my basis the first year and not be taxed for this amount since I have already paid taxes on this amount?

A: No. You will fill out form 8606 which will compute the percentage of the value of your IRA which your non-deductible contributions constitute and that will be the percentage of your distribution which is tax free. This process will continue annually until you have recovered all of your basis.

Q: My sister passed away last year. We have received her IRA distribution as beneficiaries, is the total distribution taxable as income to us?

A: If your sister did not have a cost basis in her IRA, then any distribution to the beneficiaries is completely taxable as an IRA distribution. She would not have had a cost basis unless she either made nondeductible contributions to her IRA or she rolled over a pension plan in which she had made after-tax contributions.

Q: My income was very low this year. It looks like a good time to convert my IRAs to ROTH IRAs. When converting a regular IRA to a ROTH, what am I taxed on?

A: You are taxed on the full amount converted unless your IRA had a cost basis. Your IRA would only have a cost basis if you had made nondeductible contributions or you rolled over a pension in which you had made after-tax contributions.

You can convert your IRAs into Roths, if for the tax year your modified AGI is not more than $100,000, and you are not married filing separately.

If you do have a cost basis in the IRA you plan to convert, you complete Form 8606 Parts I & II for the year you convert to determine the taxable amount.

Q: I am over 55, but not yet 59 1/2 years old. Last June I had to take some money from my IRA rollover account because I was laid off from work. Do I need to pay the 10% early withdrawal penalty?

A: Taking out money from a traditional IRA because of a job loss is not one of the exceptions to the 10% penalty. A couple of possible exceptions may apply to your situation. If so, they could reduce the penalty you may owe. You should look at IRS Publication 590 for information about these and if they may apply to you.
1) If your unreimbursed medical expenses for the year were more than 7 1/2 % of your Adjusted Gross Income, the amount of those expenses that exceeded 7 1/2 % can be used to reduce the amount of your IRA distribution which is subject to the 10 % penalty; or
2) Since you lost your job - If you were on unemployment for at least 12 weeks, the amount of any medical insurance premiums you paid out of pocket can be used to reduce the amount of your IRA distribution which is subject to the 10 % penalty.
See Publication 590 for the specifics on these exceptions. Form 5329 is used to claim an exemption from the penalty on your tax return.

Q: I have multiple IRA accounts at one financial institution. They are all traditional IRAs. I have to start taking my RMD this year. Can I just add up all the accounts and make the calculation or do I perform the calculation on each IRA?

A: In order to calculate an RMD, you perform the calculation on each IRA account. You add up the individual RMDs to get a total RMD. You may take the total RMD from any account or accounts. This instruction is on the top of page 39 of Pub 590.

Note, that the reason the instructions say to perform a calculation on each IRA is that it is possible that you may have to use a different life expectancy on different IRAs to compute your RMD. E.g., If one IRA is an an inherited IRA and the other IRA is your own and your spouse who is 5 years younger than you is the sole beneficiary, you must use two different factors to determine the RMD on each account. Once you had made the two calculations, you could add the two RMDs together and then take the distribution from both accounts or from either one. The total distribution(s) for the year must equal your total RMD.

Q: I had to cash in an IRA that was in my name because I got divorced and the court ordered it. I received a 1099-R from the bank. I know that I am supposed to list this on my Fed. tax return.
Is there any way or form that will allow me to just have to show half of the 1099-R on my return because my former spouse got half of the IRA per court order?

A: This issue is one that requires expert planning before any event takes place. The tax law in this area (transfers incident to a divorce) is pretty clear and you appear not be in compliance.

If a court or your divorce orders some part of your IRA assets to be awarded to your spouse or former spouse as part of a division of property, then a transfer incident to divorce should be arranged such that the required amount is transferred to her IRA. This is a tax free exchange. Typically, it is accomplished either by a trustee to trustee transfer or by splitting the IRA into two IRA accounts and renaming one of them in the name of the other spouse.

You apparently took a taxable distribution from the IRA and then turned over some part of it to her. This does not comply with tax law as a tax-free exchange. You are subject to tax on the whole distibution.

You may want to discuss this issue with a tax attorney or CPA who has expertise in division of property and Title 26, Section 408(d)(6) of the US Code (aka Internal revenue Code).

Q: My Roth IRA, on which taxes were already paid, has lost a lot of money. Can I take a tax loss on this?

A: Not while you still have any Roth IRA accounts with a balance.

When you liquidate the last of your Roth IRA accounts, if you get back less than the amount you converted and/or contributed, there is the potential to take a loss. Any loss would get reported as a miscellaneous itemized deduction subject to the 2% of AGI limitation on Form 1040 Schedule A.

Q: What is the deadline for making an annual contribution to an IRA or Roth IRA??

A: You can make an annual contribution up to the due date of your tax return including extensions. Be sure to indicate the contribution tax year to the trustee.

Q: I was age 70 on Oct 31st of 2008. When will I be required to take minimum distribution of my IRA's?

A: Normally, you must begin receiving required minimum distributions when you turn age 70 1/2. You will be age 70 1/2 on April 30, 2009. Therefore, you are required to take your first minimum distribution for tax year 2009. Tax law gives you the option to defer your first required distribution to your Required Beginning Date (RBD). In your case, that would be 4/1/2010.

However, Congress passed new legislation that allows taxpayers to suspend the requirement for taking mandatory distributions for tax year 2009. Therefore, you are required to take any distribution for tax year 2009. Your first required distribution will be for tax year 2010. You will have until 12/31/2010 to take that distribution.

Q: I am 61 1/2 years old. I withdrew $40,000.00 from an IRA that was funded from a 401K rollover. I used the funds in order to buy a home. The 1099-R box 7 shows a distribution code of 7, and the IRA/SEP/SIMPLE box is checked. How do I list this on my Federal return and is the amount subject to any penalty.

A: Distribution code 7 in box 7 of the 1099-R indicates that this is a normal distribution and is not subject to the 10% early withdrawal penalty because you are over the age of 591/2.
You use the information from the 1099-R to enter the gross distribution amount on line 15a of the 1040 tax form and the taxable amount on 15b.

Q: I have various retirement accounts including a 401K, 403b and IRA accounts. I am over 70 1/2. Can I total them all up to figure my minimum required distribution and then just take the money from one account?

A: No.

A computation for each separate IRA account is performed to arrive at the RMD for that account. Once you have all the IRA RMDs totaled, you can then take the distribution from any of the IRA accounts.

The RMD computation for a tax deferred retirement plan is a separate calculation from your IRA computation. This RMD amount must come from the deferred plan. I.e., you must take a 401K distribution, and a 403b distribution.

Q: My spouse is retired and had no earned income. I, however, did have earned income and I participate in my company's retirement plan. If we file married, filing jointly, is she eligible to make a deductible traditional IRA contribution, based on my earned compensation?

A: She may use your earned income to make an IRA contribution. She may deduct her contribution as long as your joint AGI is less than $159,000. Between $159,000 and $169,000 the amount deductible phases out to zero. These numbers are for tax year 2008 and are adjusted upward from time to time. See the instructions for either Form 1040 or 1040A for the current limits. There is a worksheet in both documents that you can use to compute the amount deductible.

Q: I was over 70 1/2 at the end of last year and forgot to take the minimum distribution from my IRA. I know I will pay a 50% penalty but will I still have to withdraw the proper RMD?

A: Yes. You should immediately make a distribution to include all the monies you should have withdrawn last year. You will still need to take an RMD for the current year by December 31 of this year. Note, that the RMD requirement has been suspended for 2009.

You need to report the fact you did not make the required distribution last year, using Forms 5329 and 1040. Include the penalty with your return.

Form 5329 and its instructions can be found at:

http://www.irs.gov/pub/irs-pdf/f5329.pdf
http://www.irs.gov/pub/irs-pdf/i5329.pdf

If the excess accumulation (failure to withdraw the required minimum) is due to reasonable error, and you have taken, or are taking, steps to remedy the insufficient distribution, you can request that the tax be excused. In that case attach a letter of explanation with your return.

If the IRS approves your request, it will refund the excess accumulations tax you paid.