In general, distributions from a traditional IRA are taxable in the
year you receive them.
Failed financial institutions.
This general rule applies to distributions made (with or without
your consent) by a state agency as receiver of an insolvent savings
institution. This means you must include such distributions in your
gross income unless you can roll them over. For an exception to the
1-year waiting period rule for rollovers of certain distributions from
failed financial institutions, see Exception under
Rollover From One IRA Into Another, earlier.
Exceptions.
Exceptions to the general rule are rollovers and tax-free
withdrawals of contributions, discussed earlier, and the return of
nondeductible contributions, discussed next under Distributions
Fully or Partly Taxable.
Although a conversion of a traditional IRA is considered a rollover
for Roth IRA purposes, it is not an exception to the general rule for
distributions from a traditional IRA. Conversion distributions are
includable in your gross income subject to these rules and the special
rules for conversions explained in chapter 2.
Ordinary income.
Distributions from traditional IRAs that you include in income are
taxed as ordinary income.
No special treatment.
In figuring your tax, you cannot use the 10-year tax option or
capital gain treatment that applies to lump-sum distributions from
qualified employer plans.
Distributions Fully or Partly Taxable
Distributions from your traditional IRA may be fully or partly
taxable, depending on whether your IRA includes any nondeductible
contributions.
Fully taxable.
If only deductible contributions were made to your traditional IRA
(or IRAs, if you have more than one), you have no basis in
your IRA. Because you have no basis in your IRA, any distributions are
fully taxable when received. See Reporting and Withholding
Requirements for Taxable Amounts, later.
Partly taxable.
If you made nondeductible contributions to any of your traditional
IRAs, you have a cost basis (investment in the contract)
equal to the amount of those contributions. These nondeductible
contributions are not taxed when they are distributed to you. They are
a return of your investment in your IRA.
Only the part of the distribution that represents nondeductible
contributions (your cost basis) is tax free. If nondeductible
contributions have been made, distributions consist partly of
nondeductible contributions (basis) and partly of deductible
contributions, earnings, and gains (if there are any). Until all of
your basis has been distributed, each distribution is partly
nontaxable and partly taxable.
Form 8606.
You must complete Form 8606, and attach it to your return, if you
receive a distribution from a traditional IRA and have ever made
nondeductible contributions to any of your traditional IRAs. Using the
form, you will figure the nontaxable distributions for 2000, and your
total IRA basis for 2000 and earlier years. See the illustrated Forms
8606 in Appendix D.
Note.
If you are required to file Form 8606, but you are not required to
file an income tax return, you still must file Form 8606.
Complete Form 8606, sign it, and send it to the IRS at the time and
place you would otherwise file an income tax return.
Figuring the Nontaxable and
Taxable Amounts
If your traditional IRA includes nondeductible contributions and
you received a distribution from it in 2000, you must use Form 8606 to
figure how much of your 2000 IRA distribution is tax free.
Contribution and distribution in the same year.
If you received a distribution in 2000 from a traditional IRA and
you also made contributions to a traditional IRA for 2000 that may not
be fully deductible because of the income limits, you can use the
following worksheet to figure how much of your 2000 IRA distribution
is tax free and how much is taxable. Then you can figure the amount of
nondeductible contributions to report on Form 8606. Use the related
instructions, under Reporting your nontaxable distribution on
Form 8606, later, to figure your remaining basis after the
distribution.
Form 8606 - Rose
Using the worksheet.
Form 8606 and the related instructions may be helpful when using
this worksheet.
When used in the following worksheet the term outstanding
rollover refers to an amount distributed from a traditional IRA
as part of a rollover that, as of December 31, 2000, had not yet been
reinvested into another traditional IRA.
Worksheet To Figure
Taxable Part of Distribution
| Use only if you made contributions to a
traditional IRA for 2000 and have to figure the taxable part of your
2000 distributions to determine your modified AGI. See Limit If
Covered By Employer Plan, earlier. |
| 1) |
Enter the basis in your traditional IRA(s) as
of 12/31/99 |
$ |
| 2) |
Enter the total of all contributions made to
your traditional IRAs during 2000 and all contributions made during
2001 that were for 2000, whether or not deductible. Do not
include rollover contributions properly rolled over into IRAs |
$ |
| 3) |
Add lines 1 and 2 |
$ |
| 4) |
Enter the value of ALL your traditional
IRA(s) as of
12/31/00 (include any outstanding rollovers from
traditional IRAs to other traditional IRAs) |
$ |
| 5) |
Enter the total distributions from
traditional IRAs (including amounts converted to Roth IRAs that will
be shown on line 14c of Form 8606) received in 2000. (Do not include
outstanding rollovers included on line 4 or any rollovers between
traditional IRAs completed by 12/31/00. Also, do not include certain
returned contributions described in the instructions for line 7, Part
I, of Form 8606.) |
$ |
| 6) |
Add lines 4 and 5 |
$ |
| 7) |
Divide line 3 by line 6. Enter the result as
a decimal
(to at least two places). Do not enter more than 1.00 |
|
| 8) |
Nontaxable portion of the
distribution. Multiply line
5 by line 7. Enter the result here and on line 10 of
Form 8606 |
$ |
| 9) |
Taxable portion of the distribution
(before adjustment for conversions). Subtract line 8 from line
5. Enter the result here and if there are no amounts converted to Roth
IRAs, STOP HERE and enter the result on line 13 of Form
8606 |
$ |
| 10) |
Enter the amount included on line 9 that is
allocable
to amounts converted to Roth IRAs by 12/31/00. (See
Note at the end of this worksheet.) Enter here
and on line 16 of Form 8606. |
$ |
| 11) |
Taxable portion of the distribution
(after adjustment for conversions). Subtract line 10 from line
9. Enter the result here and on line 13 of Form 8606 |
$ |
Note. If the amount on line 5 of this worksheet includes
an amount converted to a Roth IRA by 12/31/00, you must determine the
percentage of the distribution allocable to the conversion. To figure
the percentage, divide the amount converted (from line 14c of Form
8606) by the total distributions shown on line 5. To figure the
amounts to include on line 10 of this worksheet and on line 16, Part
II of Form 8606, multiply line 9 of the worksheet by the percentage
you figured.
Reporting your nontaxable distribution on Form 8606.
To report your nontaxable distribution and to figure the remaining
basis in your traditional IRA after distributions, you must complete
the previous worksheet before completing Form 8606. Then follow these
steps to complete Form 8606.
- Use the worksheet in the Form 1040 or 1040A instructions to
figure your deductible contributions to traditional IRAs to report on
line 23 of Form 1040 or line 16 of Form 1040A.
- After you complete the worksheet in the form instructions,
enter your nondeductible contributions to traditional IRAs on line 1
of Form 8606.
- Complete lines 2 through 5 of Form 8606.
- If line 5 of Form 8606 is less than line 8 of the above
worksheet, complete lines 6 through 13 of Form 8606 and STOP
HERE.
- If line 5 of Form 8606 is equal to or greater than line 8 of
the above worksheet, follow instructions 6 and 7, next. Do not
complete lines 6 through 9 of Form 8606.
- Enter the amount from line 8 of the above worksheet on line
10 of Form 8606.
- Complete lines 11 and 12 of Form 8606.
- Enter the amount from line 9 of the above worksheet (or, if
you entered an amount on line 11, the amount from that line) on line
13 of Form 8606.
Example.
Rose Green has made the following contributions to her traditional
IRAs.
|
Year |
Deductible |
Nondeductible |
| 1993 |
$2,000 |
-0- |
| 1994 |
2,000 |
-0- |
| 1995 |
2,000 |
-0- |
| 1996 |
1,000 |
-0- |
| 1997 |
1,000 |
-0- |
| 1998 |
1,000 |
-0- |
| 1999 |
700 |
$ 300 |
| Totals |
$9,700 |
$ 300 |
In 2000, Rose, whose IRA deduction for that year may be
reduced or eliminated, makes a $2,000 contribution that may be partly
nondeductible. She also receives a distribution of $5,000 for
conversion to a Roth IRA. She completed the conversion before 12/31/00
and did not recharacterize any contributions. At the end of 2000, the
fair market values of her accounts, including earnings, total $20,000.
She did not receive any tax-free distributions in earlier years. The
amount she includes in income for 2000 is figured as follows:
Worksheet To Figure
Taxable Part of Distribution
| Use only if you made contributions to a traditional IRA for 2000 and have to figure the taxable part of your 2000 distributions to determine your modified AGI. See How Much Can I Deduct?, earlier. |
| 1) |
Enter the basis in your traditional IRA(s) as of 12/31/99 |
$ 300 |
| 2) |
Enter the total of all contributions made to your traditional IRAs during 2000 and all contributions made during 2001 that were for 2000, whether or not deductible. Do not include rollover contributions properly rolled over into IRAs |
$ 2,000 |
| 3) |
Add lines 1 and 2 |
$ 2,300 |
| 4) |
Enter the value of ALL your traditional
IRA(s) as of 12/31/00 (include any outstanding rollovers from traditional IRAs to other traditional IRAs) |
$ 20,000 |
| 5) |
Enter the total distributions from traditional IRAs (including amounts converted to Roth IRAs that will be shown on line 14c of Form 8606) received in 2000. (Do not include
outstanding rollovers included on line 4 or any rollovers between
traditional IRAs completed by 12/31/00. Also, do not include certain
returned contributions described in the instructions for line 7, Part
I, of Form 8606.) |
$ 5,000 |
| 6) |
Add lines 4 and 5 |
$ 25,000 |
| 7) |
Divide line 3 by line 6. Enter the result as a decimal (to at least two places). Do not enter more than 1.00 |
0.092 |
| 8) |
Nontaxable portion of the distribution. Multiply line 5 by line 7. Enter the result here and on line 10 of Form 8606 |
$ 460 |
| 9) |
Taxable portion of the distribution (before adjustment for conversions). Subtract line 8 from line
5. Enter the result here and if there are no amounts converted to Roth IRAs, STOP HERE and enter the result on line 13 of Form 8606 |
$ 4,540 |
| 10) |
Enter the amount included on line 9 that is allocable to amounts converted to Roth IRAs by 12/31/00. (See Note at the end of this worksheet.) Enter here and on line 16 of Form 8606. |
$ 4,540 |
| 11) |
Taxable portion of the distribution
(after adjustment for conversions). Subtract line 10 from line
9. Enter the result here and on line 13 of Form 8606 |
$ -0- |
Note. If the amount on line 5 of this worksheet includes
an amount converted to a Roth IRA by 12/31/00, you must determine the
percentage of the distribution allocable to the conversion. To figure
the percentage, divide the amount converted (from line 14c of Form
8606) by the total distributions shown on line 5. To figure the
amounts to include on line 10 of this worksheet and on line 16, Part
II of Form 8606, multiply line 9 of the worksheet by the percentage
you figured.
The Form 8606 for Rose, illustrated earlier, shows the information
required when you need to use the above worksheet to figure your
nontaxable distribution. Assume that the amount used on line 1 of Form
8606 is the amount Rose figured using instructions 1 and 2 given
earlier under Reporting your nontaxable distribution on Form
8606.
Recognizing Losses on IRA Investments
If you have a loss on your traditional IRA investment, you can
recognize the loss on your income tax return, but only when all the
amounts in all your traditional IRA accounts have been distributed to
you and the total distributions are less than your unrecovered basis,
if any. Your basis is the total amount of the nondeductible
contributions in your traditional IRAs. You claim the loss as a
miscellaneous itemized deduction, subject to the 2% limit, on Schedule
A, Form 1040.
Example.
Bill King has made nondeductible contributions to a traditional IRA
totaling $2,000, giving him a basis at the end of 1999 of $2,000. By
the end of 2000, his IRA earns $400 in interest income. In that year,
Bill receives a distribution of $600 ($500 basis + $100 interest),
reducing the value of his IRA to $1,800 ($2,000 + 400 - 600) at
year's end. Bill figures the taxable part of the distribution and his
remaining basis on Form 8606 (illustrated in Appendix D).
In 2001, Bill's IRA has a loss of $500. At the end of
that year, Bill's IRA balance is $1,300 ($1,800 - 500). Bill's
remaining basis in his IRA is $1,500 ($2,000 - 500). Bill
receives the $1,300 balance remaining in the IRA. He can claim a loss
for 2001 of $200 (the $1,500 basis minus the $1,300 distribution of
the IRA balance). Bill completes Form 8606 as illustrated in
Appendix D.
Inherited IRAs
The beneficiaries of your traditional IRA must include in their
gross income any distributions they receive.
Beneficiaries.
Your beneficiaries can include your estate, your dependents, and
anyone you choose to receive the benefits of your IRA after you die.
Spouse.
If you inherit an interest in a traditional IRA from your spouse,
you can elect to treat the entire inherited interest as your own IRA
as discussed under What If I Inherit an IRA?, earlier. Also
see the discussion earlier under When Must I Withdraw IRA Assets?
(Required Distributions) for the rules on when you must begin to
receive distributions from the IRA.
Beneficiary other than spouse.
If you inherit a traditional IRA from someone other than your
spouse, you cannot treat it as your own IRA. You cannot roll over any
part of it or roll any amount over into it. You cannot make any
contributions to an inherited traditional IRA.
IRA with basis.
If you inherit a traditional IRA from a person who had a basis in
the IRA because of nondeductible contributions, that basis remains
with the IRA. Unless you are the decedent's spouse and choose to treat
the IRA as your own, you cannot combine this basis with any basis you
have in your own traditional IRA(s) or any basis in traditional IRA(s)
you inherited from other decedents. If you take a distribution from an
inherited IRA and your IRA, and each has basis, you must complete
separate Forms 8606 to determine the taxable and nontaxable portions
of those distributions.
Federal estate tax deduction.
Your beneficiary may be able to claim a deduction for estate tax
resulting from certain distributions from your traditional IRA after
you die. The beneficiary can deduct the estate tax paid on any part of
a distribution that is income in respect of a decedent. He or she can
take the deduction for the tax year the income is reported. For
information on claiming this deduction, see Other Tax Information
in Publication 559,
Survivors, Executors, and
Administrators.
Any taxable part of a distribution that is not income in respect of
a decedent is a payment the beneficiary must include in income.
However, the beneficiary cannot take any estate tax deduction for this
part.
A surviving spouse can roll over the distribution to another
traditional IRA and avoid including it in income for the year
received.
Form 1040 and Form 1040A
Other Special IRA Distribution Situations
Two other special IRA distribution situations are discussed below.
Distribution of an annuity contract from your IRA account.
You can tell the trustee or custodian of your traditional IRA
account to use the amount in the account to buy an annuity contract
for you. You are not taxed when you receive the annuity contract. You
are taxed when you start receiving payments under that annuity
contract.
Tax treatment.
If only deductible contributions were made to your traditional IRA
since it was set up (this includes all your traditional IRAs, if you
have more than one), the annuity payments are fully taxable.
If any of your traditional IRAs include both deductible and
nondeductible contributions, the annuity payments are taxed as
explained earlier under Distributions Fully or Partly Taxable.
Cashing in retirement bonds.
When you cash in retirement bonds, you are taxed on the entire
amount you receive. If you do not cash in your bonds before the end of
the year in which you reach age 70 1/2, you will be taxed
on the entire value of the bonds at that time. Bond value is the
amount you would have received if you had cashed in the bonds at that
time. When the bonds are cashed later, you will not be taxed again.
Reporting and Withholding Requirements for Taxable Amounts
If you receive a distribution from your traditional IRA, you will
receive Form 1099-R, or a similar statement. IRA distributions
are shown in boxes 1 and 2 of Form 1099-R. A number or letter
code in box 7 tells you what type of distribution you received from
your IRA.
Number codes.
Some of the number codes are explained below. All the codes are
explained in the instructions for recipients on Form 1099-R.
- 1--Early distribution, no known exception.
- 2--Early distribution, exception applies.
- 3--Disability.
- 4--Death.
- 5--Prohibited transaction.
- 7--Normal distribution.
- 8--Excess contributions plus earnings/
excess deferrals (and/or earnings)
taxable in 2000.
Letter codes.
Some of the letter codes are explained below. All the codes are
explained in the instructions for recipients on Form 1099-R.
- D--Excess contributions plus earnings/
excess deferrals taxable in 1998.
- G--Direct rollover to IRA.
- H--Direct rollover to qualified plan or
tax-sheltered annuity or a transfer
from a conduit IRA to a qualified plan.
- J--Distribution from a Roth IRA.
- M--Distribution from an education IRA.
- P--Excess contributions plus earnings/
excess deferrals taxable in 1999.
- R--Recharacterized IRA contribution.
- S--Early distributions from a SIMPLE IRA in first
2 years, no known exception.
If the distribution shown on Form 1099-R is from your
IRA, SEP-IRA, or SIMPLE IRA, the small box in box 7 (labeled
IRA/SEP/SIMPLE) should be marked with an "X."
Withholding.
Federal income tax is withheld from distributions from traditional
IRAs unless you choose not to have tax withheld.
The amount of tax withheld from an annuity or a similar periodic
payment is based on your marital status and the number of withholding
allowances you claim on your withholding certificate (Form
W-4P). If you have not filed a certificate, tax will be withheld
as if you are a married individual claiming three withholding
allowances.
Generally, tax will be withheld at a 10% rate on a nonperiodic
distribution.
IRA distributions delivered outside the United States.
In general, if you are a U.S. citizen or resident alien and your
home address is outside the United States or its possessions, you
cannot choose exemption from withholding on distributions from your
traditional IRA.
To choose exemption from withholding, you must certify to the payer
under penalties of perjury that you are not a U.S. citizen, a resident
alien of the United States, or a tax-avoidance expatriate.
Even if this election is made, the payer must withhold tax at the
rates prescribed for nonresident aliens.
More information.
For more information, see Pensions and Annuities in
chapter 1 of Publication 505,
Tax Withholding and Estimated
Tax. See also Publication 515,
Withholding of Tax on
Nonresident Aliens and Foreign Corporations.
Reporting taxable distributions on your return.
Report fully taxable distributions, including early distributions,
on line 15b, Form 1040 (no entry is required on line 15a), or line
11b, Form 1040A. If only part of the distribution is taxable, enter
the total amount on line 15a, Form 1040 (or line 11a, Form 1040A), and
the taxable part on line 15b (or 11b). You cannot report distributions
on Form 1040EZ.
Estate tax.
Generally, the value of an annuity or other payment receivable by
any beneficiary of a decedent's traditional IRA that represents the
part of the purchase price contributed by the decedent (or by his or
her former employer(s)), must be included in the decedent's gross
estate. For more information, see the instructions for Schedules I and
S, Form 706, United States Estate (and Generation-Skipping
Transfer) Tax Return.
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