22 THE QUEENS COURIER • FEBRUARY 16, 2017 FOR BREAKING NEWS VISIT WWW.QNS.COM “Over Two Decades Of Personalized Service” Call Now & End Your Tax Nightmare! �������������������������������������� �������������������������������������� �������������������������������� �������������������������������������������������� ������������������������������������������ Co-Author of the best selling book “Breaking the Tax Code” �������������������������������� �������������������������������� Salvatore P. Candela, EA, ATA, ABA Enrolled Agent - Tax Advisor ���������������������������������������������������������������� ������������������������������������������������������ TAX TIPS How to deal with a traditional IRA BY JOHN SAVIGNANO Workers under age 70 1/2 can deduct contributions to a traditional IRA, as long as they are not covered by an employer’s retirement plan. Th e same is true for those workers’ spouses. If these taxpayers are covered by an employer plan, they may or may not be able to deduct IRA contributions, depending on the taxpayer’s income. However, all eligible workers and spouses can make nondeductible contributions to a traditional IRA, regardless of income. Inside a traditional IRA, any investment earnings will be untaxed. Problems can arise for people who hold nondeductible dollars in their IRAs when they take distributions. Unless they’re careful, they may pay tax twice on the same dollars. Example 1: Marge Barnes has $100,000 in her traditional IRA on Feb. 15, 2017. Over the years, she has made deductible and nondeductible contributions. Assume that $25,000 came from nondeductible contributions, $45,000 came from deductible contributions, and $30,000 came from investment earnings inside Marge’s IRA. Now Marge wants to take a $20,000 distribution; indeed, Marge’s IRA custodian may report a $20,000 distribution to the IRS. However, Marge would be making a mistake, resulting in a tax overpayment. To the IRS, a taxpayer’s IRA money must be stirred together to include pre-tax and aft er-tax dollars. Any distribution is considered to be proportionate. If Marge were to pay tax on a full $20,000 distribution, she would eff ectively be paying tax twice on the aft er-tax dollars included in this distribution. Example 2: Aft er hearing about this rule, Marge calculates that her $25,000 of aft ertax money (her nondeductible contributions) was 25% of her $100,000 IRA on the date of the distribution. Th us, 25% of the $20,000 represented aft er-tax dollars, so Marge reports the $15,000 remainder of the distribution as a taxable withdrawal of pretax dollars. Again this would be incorrect. Tax rules require an IRA’s aft er-tax contributions to be compared with the yearend IRA balance, plus distributions during the year, to calculate the ratio of pre-tax and aft er-tax dollars involved in a distribution. Example 3: Assume that Marge’s IRA holds $90,000 on Dec. 31, 2017. Her $100,000 IRA was reduced by the $20,000 distribution in February, but increased by subsequent contributions and investment earnings. Th erefore, Marge’s IRA balance for this calculation is $110,000 (the $90,000 at year-end plus the $20,000 distribution). Th is assumes no other distributions in 2017. Accordingly, Marge divides her $110,000 IRA balance into the $25,000 of aft er-tax money used in this example. Th e result — 22.7% — is the portion of her distribution representing aft er-tax dollars. Of Marge’s $20,000 distribution, $4,540 (22.7%) is a tax-free return or aft er-tax dollars, and the balance ($15,460) is reported as taxable income. Marge reduces the aft er-tax dollars, and the balance ($15,460) is reported as taxable income. Marge reduces the aft er-tax dollars in her IRA by that $4,540, from $25,000 to $20,460, so the tax on future IRA distributions can be computed. Th e best way to deal with this issue is to track pre-tax and aft er-tax IRA money by fi ling IRS Form 8606 with your federal income tax return each year that your IRA holds aft er-tax dollars. John Savignano is a partner with Savignano Accountants & Advisors located at 47-46 Vernon Blvd., Second Floor, in Long Island City. For questions, dial 718-707-0955. LJC@loucarino.com
QC02162017
To see the actual publication please follow the link above