# Department of the Treasury (2014) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3A00d3de7993899368 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text Department of the Treasury Internal Revenue Service Contents What's New for 2014 . . . . . . . . . . . . . . . . . . . . . . . . 1 Publication 590-B What's New for 2015 . . . . . . . . . . . . . . . . . . . . . . . . 1 Cat. No. 66303U Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Distributions from Individual Retirement Arrangements (IRAs) Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 For use in preparing 2014 Returns Chapter 1. Traditional IRAs . . . . . . . . . . . . . . . . . . 5 What if You Inherit an IRA? . . . . . . . . . . . . . . . . . 5 When Can You Withdraw or Use Assets? . . . . . . . 6 When Must You Withdraw Assets? (Required Minimum Distributions) . . . . . . . . . . . . . . . . . . 6 Are Distributions Taxable? . . . . . . . . . . . . . . . . 12 What Acts Result in Penalties or Additional Taxes? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Chapter 2. Roth IRAs . . . . . . . . . . . . . . . . . . . . . 29 What Is a Roth IRA? . . . . . . . . . . . . . . . . . . . . . 29 Are Distributions Taxable? . . . . . . . . . . . . . . . . 30 Must You Withdraw or Use Assets? . . . . . . . . . . 35 Chapter 3. How To Get Tax Help . . . . . . . . . . . . . 37 Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 What's New for 2014 Publication 590 split. Publication 590 has been split into two separate publications as follows. Publication 590-A, covers contributions to traditional IRAs as well as Roth IRAs. This publication will include the rules for rollover and conversion contributions. Publication 590-B, covers distributions from traditional IRAs as well as Roth IRAs. This publication will include the rules for required minimum distributions and IRA beneficiaries. What's New for 2015 Application of one-rollover-per-year limitation. Beginning in 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period regardless of the number of IRAs you own. However, you can continue to make unlimited trustee-to-trustee transfers between IRAs because it is not considered a rollover. Furthermore, you can also make as many rollovers from a traditional IRA to a Roth IRA (also known as “conversions”). For more information, see Publication 590-A. Get forms and other information faster and easier at: • IRS.gov (English) • IRS.gov/Korean (한국어) • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский) • IRS.gov/Chinese (中文) • IRS.gov/Vietnamese (TiếngViệt) Jan 07, 2015 Reminders Future developments. For the latest information about developments related to Publication 590-B, such as legislation enacted after it was published, go to www.irs.gov/ pub590. Simplified employee pension (SEP). SEP IRAs are not covered in this publication. They are covered in Publication 560, Retirement Plans for Small Business. Deemed IRAs. A qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. If the separate account or annuity otherwise meets the requirements of an IRA, it will be subject only to IRA rules. An employee's account can be treated as a traditional IRA or a Roth IRA. For this purpose, a “qualified employer plan” includes: A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan), A qualified employee annuity plan (section 403(a) plan), A tax-sheltered annuity plan (section 403(b) plan), and A deferred compensation plan (section 457 plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state. Statement of required minimum distribution (RMD). If an RMD is required from your IRA, the trustee, custodian, or issuer that held the IRA at the end of the preceding year must either report the amount of the RMD to you, or offer to calculate it for you. The report or offer must include the date by which the amount must be distributed. The report is due January 31 of the year in which the minimum distribution is required. It can be provided with the year-end fair market value statement that you normally get each year. No report is required for section 403(b) contracts (generally tax-sheltered annuities) or for IRAs of owners who have died. IRA interest. Although interest earned from your IRA is generally not taxed in the year earned, it is not tax-exempt interest. Tax on your traditional IRA is generally deferred until you take a distribution. Do not report this interest on your return as tax-exempt interest. For more information on tax-exempt interest, see the instructions for your tax return. Net Investment Income Tax. For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), or 457(b) plans, and IRAs). However, these distributions are taken into account when determining the modified adjusted gross income threshold. Distributions from a nonqualified retirement plan are included in net investment income. See Form 8960, Net Investment Tax–Individuals, Estates, and Trusts, and its instructions for more information. Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Page 2 Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Introduction This publication discusses distributions from individual retirement arrangements (IRAs). An IRA is a personal savings plan that gives you tax advantages for setting aside money for retirement. For information about contributions to an IRA, see Publication 590-A. What are some tax advantages of an IRA? Two tax advantages of an IRA are that: Contributions you make to an IRA may be fully or partially deductible, depending on which type of IRA you have and on your circumstances, and Generally, amounts in your IRA (including earnings and gains) are not taxed until distributed. In some cases, amounts are not taxed at all if distributed according to the rules. What's in this publication? This publication discusses traditional and Roth IRAs. It explains the rules for: Handling an inherited IRA, and Receiving distributions (making withdrawals) from an IRA. It also explains the penalties and additional taxes that apply when the rules are not followed. To assist you in complying with the tax rules for IRAs, this publication contains worksheets, sample forms, and tables, which can be found throughout the publication and in the appendices at the back of the publication. How to use this publication. The rules that you must follow depend on which type of IRA you have. Use Table I-1 to help you determine which parts of this publication to read. Also use Table I-1 if you were referred to this publication from instructions to a form. Comments and suggestions. We welcome your comments about this publication and your suggestions for future editions. You can send us comments from www.irs.gov/ formspubs. Click on “More Information” and then on “Give us feedback.” Or you can write to: Internal Revenue Service Tax Forms and Publications 1111 Constitution Ave. NW, IR-6526 Washington, DC 20224 We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Publication 590-B (2014) Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Ordering forms and publications. Visit www.irs.gov/ formspubs to download forms and publications. Otherwise, you can go to www.irs.gov/orderforms to order forms or call 1-800-829-3676 to order current and prior-year forms and instructions. Your order should arrive within 10 business days. 5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–Not for Use With a Designated Financial Institution Tax questions. If you have a tax question, check the information available on IRS.gov or call 1-800-829-1040. We cannot answer tax questions sent to the above address. Useful Items You may want to see: Publications 590-A Contributions to Individual Retirement Accounts (IRAs) 560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) 571 Tax-Sheltered Annuity Plans (403(b) Plans) 575 Pension and Annuity Income 939 General Rule for Pensions and Annuities Forms (and instructions) W-4P Withholding Certificate for Pension or Annuity Payments Publication 590-B (2014) 5305-S SIMPLE Individual Retirement Trust Account 5305-SA SIMPLE Individual Retirement Custodial Account 5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–for Use With a Designated Financial Institution 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts 5498 IRA Contribution Information 8606 Nondeductible IRAs 8815 Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989 8839 Qualified Adoption Expenses 8880 Credit for Qualified Retirement Savings Contributions See chapter 3 for information about getting these publications and forms. Page 3 Table I-1. Using This Publication IF you need information on ... THEN see ... traditional IRAs chapter 1. Roth IRAs chapter 2, and parts of chapter 1. SEP IRAs, SIMPLE IRAs, and 401(k) plans Publication 560. Coverdell education savings accounts (formerly called education IRAs) Publication 970. Table I-2. How Are a Traditional IRA and a Roth IRA Different? This table shows the differences between traditional and Roth IRAs. Answers in the middle column apply to traditional IRAs. Answers in the right column apply to Roth IRAs. Question Answer Traditional IRA? Roth IRA? Do I have to start taking distributions when I reach a certain age from a . . . . . Yes. You must begin receiving required minimum distributions by April 1 of the year following the year you reach age 701 2. See When Must You Withdraw Assets? (Required Minimum Distributions) in chapter 1. No. If you are the original owner of a Roth IRA, you do not have to take distributions regardless of your age. See Are Distributions Taxable? in chapter 2. However, if you are the beneficiary of a Roth IRA, you may have to take distributions. See Distributions After Owner's Death in chapter 2. How are distributions taxed from a . . . . . Distributions from a traditional IRA are taxed as ordinary income, but if you made nondeductible contributions, not all of the distribution is taxable. See Are Distributions Taxable? in chapter 1. Distributions from a Roth IRA are not taxed as long as you meet certain criteria. See Are Distributions Taxable? in chapter 2. Do I have to file a form just because I receive distributions from a . . . . . . . . . . Not unless you have ever made a nondeductible contribution to a traditional IRA. If you have, file Form 8606. See Nondeductible Contributions in Publication 590-A. Yes. File Form 8606 if you received distributions from a Roth IRA (other than a rollover, qualified charitable distribution, one-time distribution to fund an HSA, recharacterization, certain qualified distributions, or a return of certain contributions). Page 4 Publication 590-B (2014) the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse's IRA. For more information, see When Must You Withdraw Assets? (Required Minimum Distributions), later. 1. Traditional IRAs Introduction This chapter discusses distributions from an IRA. In this publication the original IRA (sometimes called an ordinary or regular IRA) is referred to as a “traditional IRA.” A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA. What if You Inherit an IRA? If you inherit a traditional IRA, you are called a beneficiary. A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive. Inherited from spouse. If you inherit a traditional IRA from your spouse, you generally have the following three choices. You can: 1. Treat it as your own IRA by designating yourself as the account owner. 2. Treat it as your own by rolling it over into your IRA, or to the extent it is taxable, into a: a. Qualified employer plan, b. Qualified employee annuity plan (section 403(a) plan), c. Tax-sheltered annuity plan (section 403(b) plan), d. Deferred compensation plan of a state or local government (section 457 plan), or 3. Treat yourself as the beneficiary rather than treating the IRA as your own. Treating it as your own. You will be considered to have chosen to treat the IRA as your own if: Contributions (including rollover contributions) are made to the inherited IRA, or You do not take the required minimum distribution for a year as a beneficiary of the IRA. You will only be considered to have chosen to treat the IRA as your own if: You are the sole beneficiary of the IRA, and You have an unlimited right to withdraw amounts from it. However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as Inherited from someone other than spouse. If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary. Like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries. 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 distributions from both 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. A beneficiary may be able to claim a deduction for estate tax resulting from certain distributions from a traditional IRA. 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 Estate Tax Deduction under 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. More information. For more information about rollovers, required distributions, and inherited IRAs, see: Rollovers, under Can You Move Retirement Plan As­ sets, in chapter 1 of Publication 590-A, When Must You Withdraw Assets? (Required Mini­ mum Distributions), later, and The discussion of IRA Beneficiaries, later, under When Must You Withdraw Assets? (Required Mini­ mum Distributions). Chapter 1 Traditional IRAs Page 5 When Can You Withdraw or Use Assets? You can withdraw or use your traditional IRA assets at any time. However, a 10% additional tax generally applies if you withdraw or use IRA assets before you reach age 59 1 2. This is explained under Age 59 Rule under Early Distri­ butions, later. You generally can make a tax-free withdrawal of contributions if you do it before the due date for filing your tax return for the year in which you made them. This means that even if you are under age 591 2, the 10% additional tax may not apply. These distributions are explained in Publication 590-A. When Must You Withdraw Assets? (Required Minimum Distributions) You cannot keep funds in a traditional IRA indefinitely. Eventually they must be distributed. If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required. See Excess Accumulations (Insuffi­ cient Distributions), later, under What Acts Result in Pen­ alties or Additional Taxes. The requirements for distributing IRA funds differ, depending on whether you are the IRA owner or the beneficiary of a decedent's IRA. Required minimum distribution. The amount that must be distributed each year is referred to as the required minimum distribution. Distributions not eligible for rollover. Amounts that must be distributed (required minimum distributions) during a particular year are not eligible for rollover treatment. Note. A qualified charitable distribution will count towards your required minimum distribution. See Qualified charitable distributions under Are Distributions Taxable, later. IRA Owners If you are the owner of a traditional IRA, you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 701 2. April 1 of the year following the year in which you reach age 701 2 is referred to as the required beginning date. Distributions by the required beginning date. You must receive at least a minimum amount for each year starting with the year you reach age 701 2 (your 701 2 year). If you do not (or did not) receive that minimum amount in your 701 2 year, then you must receive distributions for your 701 2 year by April 1 of the next year. Page 6 Chapter 1 Traditional IRAs If an IRA owner dies after reaching age 701 2, but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date. Even if you begin receiving distributions before you reach age 701 2, you must begin calculating CAUTION and receiving required minimum distributions by your required beginning date. ! More than minimum received. If, in any year, you receive more than the required minimum distribution for that year, you will not receive credit for the additional amount when determining the minimum required distributions for future years. This does not mean that you do not reduce your IRA account balance. It means that if you receive more than your required minimum distribution in one year, you cannot treat the excess (the amount that is more than the required minimum distribution) as part of your required minimum distribution for any later year. However, any amount distributed in your 701 2 year will be credited toward the amount that must be distributed by April 1 of the following year. Distributions after the required beginning date. The required minimum distribution for any year after the year you turn 701 2 must be made by December 31 of that later year. Example. You reach age 701 2 on August 20, 2014. For 2014, you must receive the required minimum distribution from your IRA by April 1, 2015. You must receive the required minimum distribution for 2015 by December 31, 2015. If you do not receive your required minimum dis­ tribution for 2014 until 2015, both your 2014 and CAUTION your 2015 distributions will be included in income on your 2015 return. ! Distributions from individual retirement account. If you are the owner of a traditional IRA that is an individual retirement account, you or your trustee must figure the required minimum distribution for each year. See Figuring the Owner's Required Minimum Distribution below. Distributions from individual retirement annuities. If your traditional IRA is an individual retirement annuity, special rules apply to figuring the required minimum distribution. For more information on rules for annuities, see Regulations section 1.401(a)(9)-6. These regulations can be read in many libraries, IRS offices, and online at IRS.gov. Change in marital status. For purposes of figuring your required minimum distribution, your marital status is determined as of January 1 of each year. If your spouse is a beneficiary of your IRA on January 1, he or she remains a beneficiary for the entire year even if you get divorced or your spouse dies during the year. For purposes of determining your distribution period, a change in beneficiary is effective in the year following the year of death or divorce. Change of beneficiary. If your spouse is the sole beneficiary of your IRA, and he or she dies before you, your spouse will not fail to be your sole beneficiary for the year that he or she died solely because someone other than your spouse is named a beneficiary for the rest of that year. However, if you get divorced during the year and change the beneficiary designation on the IRA during that same year, your former spouse will not be treated as the sole beneficiary for that year. Figuring the Owner's Required Minimum Distribution Figure your required minimum distribution for each year by dividing the IRA account balance (defined next) as of the close of business on December 31 of the preceding year by the applicable distribution period or life expectancy. Tables showing distribution periods and life expectancies are found in Appendix B and are discussed later. IRA account balance. The IRA account balance is the amount in the IRA at the end of the year preceding the year for which the required minimum distribution is being figured. Contributions. Contributions increase the account balance in the year they are made. If a contribution for last year is not made until after December 31 of last year, it increases the account balance for this year, but not for last year. Disregard contributions made after December 31 of last year in determining your required minimum distribution for this year. Outstanding rollovers and recharacterizations. The IRA account balance is adjusted by outstanding rollovers and recharacterizations of Roth IRA conversions that are not in any account at the end of the preceding year. For a rollover from a qualified plan or another IRA that was not in any account at the end of the preceding year, increase the account balance of the receiving IRA by the rollover amount valued as of the date of receipt. If a conversion contribution is contributed to a Roth IRA and that amount (plus net income allocable to it) is transferred to another IRA in a subsequent year as a recharacterized contribution, increase the account balance of the receiving IRA by the recharacterized contribution (plus allocable net income) for the year in which the conversion occurred. Distributions. Distributions reduce the account balance in the year they are made. A distribution for last year made after December 31 of last year reduces the account balance for this year, but not for last year. Disregard distributions made after December 31 of last year in determining your required minimum distribution for this year. Example 1. Laura was born on October 1, 1943. She reaches age 701 2 in 2014. Her required beginning date is April 1, 2015. As of December 31, 2013, her IRA account balance was $26,500. No rollover or recharacterization amounts were outstanding. Using Table III in Appendix B, the applicable distribution period for someone her age (71) is 26.5 years. Her required minimum distribution for 2014 is $1,000 ($26,500 ÷ 26.5). That amount is distributed to her on April 1, 2015. Example 2. Joe, born October 1, 1943, reached 701 2 in 2014. His wife (his beneficiary) turned 56 in September 2014. He must begin receiving distributions by April 1, 2015. Joe's IRA account balance as of December 31, 2013, is $30,100. Because Joe's wife is more than 10 years younger than Joe and is the sole beneficiary of his IRA, Joe uses Table II in Appendix B. Based on their ages at year end (December 31, 2014), the joint life expectancy for Joe (age 71) and his wife (age 56) is 30.1 years. The required minimum distribution for 2014, Joe's first distribution year, is $1,000 ($30,100 ÷ 30.1). This amount is distributed to Joe on April 1, 2015. Distribution period. This is the maximum number of years over which you are allowed to take distributions from the IRA. The period to use for 2014 is listed next to your age as of your birthday in 2014 in Table III in Appendix B. Life expectancy. If you must use Table I, your life expectancy for 2015 is listed in the table next to your age as of your birthday in 2015. If you use Table II, your life expectancy is listed where the row or column containing your age as of your birthday in 2015 intersects with the row or column containing your spouse's age as of his or her birthday in 2015. Both Table I and Table II are in Appendix B. Distributions during your lifetime. Required minimum distributions during your lifetime are based on a distribution period that generally is determined using Table III (Uniform Lifetime) in Appendix B. However, if the sole beneficiary of your IRA is your spouse who is more than 10 years younger than you, see Sole beneficiary spouse who is more than 10 years younger below. To figure the required minimum distribution for 2015, divide your account balance at the end of 2014 by the distribution period from the table. This is the distribution period listed next to your age (as of your birthday in 2015) in Table III in Appendix B, unless the sole beneficiary of your IRA is your spouse who is more than 10 years younger than you. Example. You own a traditional IRA. Your account balance at the end of 2014 was $100,000. You are married and your spouse, who is the sole beneficiary of your IRA, is 6 years younger than you. You turn 75 years old in 2015. You use Table III. Your distribution period is 22.9. Your required minimum distribution for 2015 would be $4,367 ($100,000 ÷ 22.9). Sole beneficiary spouse who is more than 10 years younger. If the sole beneficiary of your IRA is your spouse and your spouse is more than 10 years younger than you, use the life expectancy from Table II (Joint Life and Last Survivor Expectancy) in Appendix B. The life expectancy to use is the joint life and last survivor expectancy listed where the row or column containing your age as of your birthday in 2015 intersects with the Chapter 1 Traditional IRAs Page 7 row or column containing your spouse's age as of his or her birthday in 2015. You figure your required minimum distribution for 2015 by dividing your account balance at the end of 2014 by the life expectancy from Table II (Joint Life and Last Survivor Expectancy) in Appendix B. Example. You own a traditional IRA. Your account balance at the end of 2014 was $100,000. You are married and your spouse, who is the sole beneficiary of your IRA, is 11 years younger than you. You turn 75 in 2015 and your spouse turns 64. You use Table II. Your joint life and last survivor expectancy is 23.6. Your required minimum distribution for 2015 would be $4,237 ($100,000 ÷ 23.6). Distributions in the year of the owner's death. The required minimum distribution for the year of the owner's death depends on whether the owner died before the required beginning date, defined earlier. If the owner died before the required beginning date, there is no required minimum distribution in the year of the owner's death. For years after the year of the owner's death, see Owner Died Before Required Beginning Date, later, under IRA Beneficiaries. If the owner died on or after the required beginning date, the IRA beneficiaries are responsible for figuring and distributing the owner's required minimum distribution in the year of death. The owner's required minimum distribution for the year of death generally is based on Table III (Uniform Lifetime) in Appendix B. However, if the sole beneficiary of the IRA is the owner's spouse who is more than 10 years younger than the owner, use the life expectancy from Table II (Joint Life and Last Survivor Expectancy). Note. You figure the required minimum distribution for the year in which an IRA owner dies as if the owner lived for the entire year. IRA Beneficiaries The rules for determining required minimum distributions for beneficiaries depend on the following. The beneficiary is the surviving spouse. The beneficiary is an individual (other than the surviving spouse). The beneficiary is not an individual (for example, the beneficiary is the owner's estate). (But see Trust as beneficiary, later, for a discussion about treating trust beneficiaries as designated beneficiaries.) The IRA owner died before the required beginning date, or died on or after the required beginning date. The following paragraphs explain the rules for required minimum distributions and beneficiaries. If distributions to the beneficiary from an inherited traditional IRA are less than the required mini­ CAUTION mum distribution for the year, discussed in this chapter under When Must You Withdraw Assets? (Required Minimum Distributions), you may have to pay a ! Page 8 Chapter 1 Traditional IRAs 50% excise tax for that year on the amount not distributed as required. For details, see Excess Accumulations (Insufficient Distributions) under What Acts Result in Penalties or Additional Taxes? later in this chapter. Surviving spouse. If you are the surviving spouse who is the sole beneficiary of your deceased spouse's IRA, you may elect to be treated as the owner and not as the beneficiary. If you elect to be treated as the owner, you determine the required minimum distribution (if any) as if you were the owner beginning with the year you elect or are deemed to be the owner. For details, see Inherited from spouse under What if You Inherit an IRA, earlier in this chapter. Note. If you become the owner in the year your deceased spouse died, do not determine the required minimum distribution for that year using your life; rather, you must take the deceased owner's required minimum distribution for that year (to the extent it was not already distributed to the owner before his or her death). You can never make a rollover contribution of a required minimum distribution. Any rollover con­ CAUTION tribution is subject to the 6% tax on excess contri­ butions. See chapter 1 of Publication 590­A for more infor­ mation on the tax on excess contributions. ! For any year after the owner’s death, where a surviving spouse is the sole designated benefi­ ciary of the account and he or she fails to take a required minimum distribution (if one is required) by De­ cember 31 under the rules discussed below for beneficia­ ries, he or she will be deemed the owner of the IRA. For details, see Inherited from spouse under What if You Inherit an IRA, earlier in this chapter. TIP Date the designated beneficiary is determined. Generally, the designated beneficiary is determined on September 30 of the calendar year following the calendar year of the IRA owner's death. In order to be a designated beneficiary, an individual must be a beneficiary as of the date of death. Any person who was a beneficiary on the date of the owner's death, but is not a beneficiary on September 30 of the calendar year following the calendar year of the owner's death (because, for example, he or she disclaimed entitlement or received his or her entire benefit), will not be taken into account in determining the designated beneficiary. An individual may be designated as a beneficiary either by the terms of the plan or, if the plan permits, by affirmative election by the employee specifying the beneficiary. Note. If a person who is a beneficiary as of the owner's date of death dies before September 30 of the year following the year of the owner's death without disclaiming entitlement to benefits, that individual, rather than his or her successor beneficiary, continues to be treated as a beneficiary for determining the distribution period. For the exception to this rule, see Death of surviving spouse prior to date distributions begin, later. Death of a beneficiary. In general, the beneficiaries of a deceased beneficiary must continue to take the required minimum distributions after the deceased beneficiary’s death, based on the distribution schedule established by that beneficiary under the rules in the following paragraphs. The beneficiaries of a deceased beneficiary do not calculate required minimum distributions using their own life expectancies. For the exception to this rule, see Death of surviving spouse prior to date distributions begin, later. More than one beneficiary. If an IRA has more than one beneficiary or a trust is named as beneficiary, see Miscel­ laneous Rules for Required Minimum Distributions, later. Owner Died On or After Required Beginning Date If the owner died on or after his or her required beginning date (defined earlier), and you are the designated beneficiary, you must base required minimum distributions for years after the year of the owner's death on the longer of: Your single life expectancy shown on Table I in Appendix B as determined under Beneficiary an individ­ ual, later, or The owner's life expectancy as determined under Death on or after required beginning date, under Ben­ eficiary not an individual, later. Surviving spouse is sole designated beneficiary. If the owner died on or after his or her required beginning date and his or her spouse is the sole designated beneficiary, the life expectancy the spouse must use to figure his or her required minimum distribution may change in a future distribution year. This change will apply where the spouse is older than the deceased owner or the spouse treats the IRA as his or her own. Owner Died Before Required Beginning Date If the owner died before his or her required beginning date (defined earlier), and you are the designated beneficiary, you generally must base required minimum distributions for years after the year of the owner's death using your single life expectancy shown on Table I in Appendix B as determined under Beneficiary an individual, later. See 5­year rule, later, for situations where an individual designated beneficiary may be required to take the entire account by the end of the fifth year following the year of the owner's death. If the owner's beneficiary is not an individual (for example, if the beneficiary is the owner's estate), the 5-year rule (discussed later) applies. Special rules for surviving spouse. If the owner died before his or her required beginning date and the surviving spouse is the sole designated beneficiary, the following rules apply. Year of first required distribution. If the owner died before the year in which he or she reached age 701 2, distributions to the spouse do not need to begin until the year in which the owner would have reached age 701 2. Death of surviving spouse prior to date distribu­ tions begin. If the surviving spouse dies before December 31 of the year he or she must begin receiving required minimum distributions, the surviving spouse will be treated as if he or she were the owner of the IRA. This rule does not apply to the surviving spouse of a surviving spouse. Example 1. Your spouse died in 2012, at age 651 2. You are the sole designated beneficiary of your spouse’s traditional IRA. You do not need to take any required minimum distribution until December 31 of 2017, the year your spouse would have reached age 701 2. If you die prior to that date, you will be treated as the owner of the IRA for purposes of determining the required distributions to your beneficiaries. For example, if you die in 2014, your beneficiaries will not have any required minimum distribution for 2014 (because you, treated as the owner, died prior to your required beginning date). They must start taking distributions under the general rules for an owner who died prior to the required beginning date. Example 2. Same as Example 1, except your sole beneficiary upon your death in 2014 is your surviving spouse. Your surviving spouse cannot wait until the year you would have turned 701 2 to take distributions using his or her life expectancy. Also, if your surviving spouse dies prior to the date he or she is required to take a distribution, he or she is not treated as the owner of the account. Just like any other individual beneficiary of an owner who dies before the required beginning date, your surviving spouse must start taking distributions in 2015 based on his or her life expectancy (or elect to fully distribute the account under the 5-year rule by the end of 2019). 5-year rule. The 5-year rule requires the IRA beneficiaries to withdraw 100% of the IRA by December 31 of the year containing the fifth anniversary of the owner’s death. For example, if the owner died in 2014, the beneficiary would have to fully distribute the plan by December 31, 2019. The beneficiary is allowed, but not required, to take distributions prior to that date. The 5-year rule never applies if the owner died on or after his or her required beginning date. Individual designated beneficiaries. The terms of most IRA plans require individual designated beneficiaries to take required minimum distributions using the life expectancy rules (explained earlier) unless such beneficiaries elect to take distributions using the 5-year rule. The deadline for making this election is December 31 of the year the beneficiary must take the first required distribution using his or her life expectancy (or December 31 of the year containing the fifth anniversary of the owner's death, if earlier). Beneficiary not an individual. The 5-year rule applies in all cases where there is no individual designated Chapter 1 Traditional IRAs Page 9 beneficiary by September 30 of the year following the year of the owner’s death or where any beneficiary is not an individual (for example, the owner named his or her estate as the beneficiary). TIP Review the IRA plan documents or consult with the IRA custodian or trustee for specifics on the 5­year rule provisions of any particular plan. If the 5­year rule applies, the amount remaining in the IRA, if any, after December 31 of the year CAUTION containing the fifth anniversary of the owner's death is subject to the 50% excise tax detailed in Excess Accumulations (Insufficient Distributions), later. ! Figuring the Beneficiary's Required Minimum Distribution How you figure the required minimum distribution depends on whether the beneficiary is an individual or some other entity, such as a trust or estate. Beneficiary an individual. If the beneficiary is an individual, to figure the required minimum distribution for 2015, divide the account balance at the end of 2014 by the appropriate life expectancy from Table I (Single Life Expectancy) in Appendix B. Determine the appropriate life expectancy as follows. Spouse as sole designated beneficiary. Use the life expectancy listed in the table next to the spouse's age (as of the spouse's birthday in 2015). Use this life expectancy even if the spouse died in 2015. If the spouse died in 2014 or a prior year, use the life expectancy listed in the table next to the spouse’s age as of his or her birthday in the year he or she died. Reduce the life expectancy by one for each year since the year following the spouse’s death. You cannot make a rollover contribution of your required minimum distributions in years after the CAUTION owner's death. Such contribution is subject to the 6% tax on excess contributions. See chapter 1 of Publica­ tion 590­A for more information on the tax on excess con­ tributions. ! Other designated beneficiary. Use the life expectancy listed in the table next to the beneficiary's age as of his or her birthday in the year following the year of the owner's death. Reduce the life expectancy by one for each year since the year following the owner's death. As discussed in Death of a beneficiary, earlier, if the designated beneficiary dies before his or her portion of the account is fully distributed, continue to use the designated beneficiary's remaining life expectancy to determine the distribution period; do not use the life expectancy of any subsequent beneficiary. Example. Your father died in 2014. You are the designated beneficiary of your father's traditional IRA. You are 53 years old in 2015, which is the year following your father's death. You use Table I and see that your life expectancy in 2015 is 31.4. If the IRA was worth $100,000 at the Page 10 Chapter 1 Traditional IRAs end of 2014, your required minimum distribution for 2015 would be $3,185 ($100,000 ÷ 31.4). If the value of the IRA at the end of 2015 was again $100,000, your required minimum distribution for 2016 would be $3,289 ($100,000 ÷ 30.4 (31.4 reduced by 1, which is the number of years following the year after your father's death in 2014)). Beneficiary not an individual. If the beneficiary is not an individual, determine the required minimum distribution for 2015 as follows. Death on or after required beginning date. Divide the account balance at the end of 2014 by the appropriate life expectancy from Table I (Single Life Expectancy) in Appendix B. Use the life expectancy listed next to the owner's age as of his or her birthday in the year of death. Reduce the life expectancy by one for each year after the year of death. (Note. Also figure the required minimum distribution for an individual beneficiary using this method if it results in a longer life expectancy where the owner died on or after the required beginning date.) Death before required beginning date. The 5-year rule (discussed earlier) applies. The entire account must be distributed by the end of the fifth year following the year of the owner's death. No distribution is required for any year before that fifth year. Note. The required beginning date was defined earlier under Distributions by the required beginning date. Example. The owner died in 2014 at the age of 80. The owner's traditional IRA went to his estate. The account balance at the end of 2014 was $100,000. In 2015, the required minimum distribution would be $10,870 ($100,000 ÷ 9.2). (The owner's life expectancy in the year of death, 10.2, reduced by one.) If the owner had died in 2014 at the age of 70, the entire account would have to be distributed by the end of 2019. See Death before required beginning date under Beneficiary not an individual above. Which Table Do You Use To Determine Your Required Minimum Distribution? There are three different life expectancy tables. The tables are found in Appendix B of this publication. You use only one of them to determine your required minimum distribution for each traditional IRA. Determine which one to use as follows. Reminder. In using the tables for lifetime distributions, marital status is determined as of January 1 each year. Divorce or death after January 1 is generally disregarded until the next year. However, if you divorce and change the beneficiary designation in the same year, your former spouse cannot be considered your sole beneficiary for that year. Table I (Single Life Expectancy). Use Table I for years after the year of the owner's death if either of the following applies. You are an individual and a designated beneficiary, but not the owner's surviving spouse and sole designated beneficiary. The beneficiary is not an individual and the owner died on or after the required beginning date, defined earlier. Surviving spouse. If you are the owner's surviving spouse and sole designated beneficiary, you will also use Table I for your required minimum distributions. However, if the owner had not reached age 701 2 when he or she died, and you do not elect to be treated as the owner of the IRA, you do not have to take distributions until the year in which the owner would have reached age 701 2. Table II (Joint Life and Last Survivor Expectancy). Use Table II if you are the IRA owner and your spouse is both your sole designated beneficiary and more than 10 years younger than you. Note. Use this table in the year of the owner's death if the owner died after the required beginning date and this is the table that would have been used had he or she not died. Table III (Uniform Lifetime). Use Table III if you are the IRA owner and your spouse is not both the sole designated beneficiary of your IRA and more than 10 years younger than you. Note. Use this table in the year of the owner's death if the owner died after the required beginning date and this is the table that would have been used had he or she not died. No table. Do not use any of the tables if the 5-year rule (discussed earlier) applies. What Age(s) Do You Use With the Table(s)? The age or ages to use with each table are explained below. 2015. You use Table I. Your distribution period for 2016 is 26.9 (27.9 − 1) years. Your distribution period for 2017 is 25.9 (27.9 − 2). Note that the life expectancy was reduced by one for each year after the first distribution year, which was 2015. Example 2. You are the owner's surviving spouse and the sole designated beneficiary. The owner would have turned age 701 2 in 2015. Distributions begin in 2015. You become 69 years old in 2015. You use Table 1. Your distribution period for 2015 is 17.8. For 2016, when you are 70 years old, your distribution period is 17.0. For 2017, when you are 71 years old, your distribution period is 16.3. Owner's life expectancy. In two cases where the owner dies on or after the required beginning date, you need to use the owner's life expectancy. First, you need to use it when the owner dies on or after the required beginning date and there is no designated beneficiary as of September 30 of the year following the year of the owner's death. In this case, use the owner's life expectancy for his or her age as of the owner's birthday in the year of death and reduce it by one for each subsequent year. Second, use the owner’s life expectancy in the year of death (reduced by one for each subsequent year) if it results in a longer distribution period than using your life expectancy as detailed in Table I (Single Life Expectancy) above. Table II (Joint Life and Last Survivor Expectancy). For your first distribution by the required beginning date, use your age and the age of your designated beneficiary as of your birthdays in the year you become age 701 2. Your combined life expectancy is at the intersection of your ages. If you are figuring your required minimum distribution for 2015, use your ages as of your birthdays in 2015. For each subsequent year, use your and your spouse's ages as of your birthdays in the subsequent year. Table III (Uniform Lifetime). For your first distribution by your required beginning date, use your age as of your birthday in the year you become age 701 2. If you are figuring your required minimum distribution for 2015, use your age as of your birthday in 2015. For each subsequent year, use your age as of your birthday in the subsequent year. Table I (Single Life Expectancy). If you are a designated beneficiary figuring your first distribution, use your age as of your birthday in the year distributions must begin. This is usually the calendar year immediately following the calendar year of the owner's death. After the first distribution year, reduce your life expectancy by one for each subsequent year. If you are the owner's surviving spouse and the sole designated beneficiary, this is generally the year in which the owner would have reached age 701 2. After the first distribution year, use your age as of your birthday in each subsequent year. Installments allowed. The yearly required minimum distribution can be taken in a series of installments (monthly, quarterly, etc.) as long as the total distributions for the year are at least as much as the minimum required amount. Example 1. You are the owner's designated beneficiary figuring your first required minimum distribution. Distributions must begin in 2015. You become 57 years old in More than one IRA. If you have more than one traditional IRA, you must determine a separate required minimum distribution for each IRA. However, you can total Miscellaneous Rules for Required Minimum Distributions The following rules may apply to you. Chapter 1 Traditional IRAs Page 11 these minimum amounts and take the total from any one or more of the IRAs. Example. Sara, born August 1, 1943, became 701 2 on February 1, 2014. She has two traditional IRAs. She must begin receiving her IRA distributions by April 1, 2015. On December 31, 2013, Sara's account balance from IRA A was $10,000; her account balance from IRA B was $20,000. Sara's brother, age 64 as of his birthday in 2014, is the beneficiary of IRA A. Her husband, age 78 as of his birthday in 2014, is the beneficiary of IRA B. Sara's required minimum distribution from IRA A is $377 ($10,000 ÷ 26.5 (the distribution period for age 71 per Table III)). The amount of the required minimum distribution from IRA B is $755 ($20,000 ÷ 26.5). The amount that must be withdrawn by Sara from her IRA accounts by April 1, 2015, is $1,132 ($377 + $755). More than minimum received. If, in any year, you receive more than the required minimum amount for that year, you will not receive credit for the additional amount when determining the minimum required amounts for future years. This does not mean that you do not reduce your IRA account balance. It means that if you receive more than your required minimum distribution in one year, you cannot treat the excess (the amount that is more than the required minimum distribution) as part of your required minimum distribution for any later year. However, any amount distributed in your 701 2 year will be credited toward the amount that must be distributed by April 1 of the following year. Example. Justin became 701 2 on December 15, 2014. Justin's IRA account balance on December 31, 2013, was $38,400. He figured his required minimum distribution for 2014 was $1,401 ($38,400 ÷ 27.4 (the distribution period for age 70 per Table III)). By December 31, 2014, he had actually received distributions totaling $3,600, $2,199 more than was required. Justin cannot use that $2,199 to reduce the amount he is required to withdraw for 2015, but his IRA account balance is reduced by the full $3,600 to figure his required minimum distribution for 2015. Justin's reduced IRA account balance on December 31, 2014, was $34,800. Justin figured his required minimum distribution for 2015 is $1,313 ($34,800 ÷ 26.5 (the distribution period for age 71 per Table III)). During 2015, he must receive distributions of at least that amount. Multiple individual beneficiaries. If as of September 30 of the year following the year in which the owner dies there is more than one beneficiary, the beneficiary with the shortest life expectancy will be the designated beneficiary if both of the following apply. All of the beneficiaries are individuals, and The account or benefit has not been divided into separate accounts or shares for each beneficiary. Separate accounts. A single IRA can be split into separate accounts or shares for each beneficiary. These separate accounts or shares can be established at any time, either before or after the owner's required beginning Page 12 Chapter 1 Traditional IRAs date. Generally, these separate accounts or shares are combined for purposes of determining the minimum required distribution. However, these separate accounts or shares will not be combined for required minimum distribution purposes after the death of the IRA owner if the separate accounts or shares are established by the end of the year following the year of the IRA owner's death. The separate account rules cannot be used by beneficiaries of a trust. Trust as beneficiary. A trust cannot be a designated beneficiary even if it is a named beneficiary. However, the beneficiaries of a trust will be treated as having been designated beneficiaries for purposes of determining required minimum distributions after the owner’s death (or after the death of the owner’s surviving spouse described in Death of surviving spouse prior to date distributions begin, earlier) if all of the following are true: 1. The trust is a valid trust under state law, or would be but for the fact that there is no corpus. 2. The trust is irrevocable or became, by its terms, irrevocable upon the owner's death. 3. The beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the owner's benefit are identifiable from the trust instrument. 4. The trustee of the trust provides the IRA custodian or trustee with the documentation required by that custodian or trustee. The trustee of the trust should contact the IRA custodian or trustee for details on the documentation required for a specific plan. The deadline for the trustee to provide the beneficiary documentation to the IRA custodian or trustee is October 31 of the year following the year of the owner's death. Trust beneficiary is another trust. If the beneficiary of the trust (which is the beneficiary of the IRA) is another trust and both trusts meet the above requirements, the beneficiaries of the other trust will be treated as having been designated as beneficiaries for purposes of determining the distribution period. Note. The separate account rules, discussed earlier, cannot be used by beneficiaries of a trust. TIP You may want to contact a tax advisor to comply with this complicated area of the tax law. Annuity distributions from an insurance company. Special rules apply if you receive distributions from your traditional IRA as an annuity purchased from an insurance company. See Regulations sections 1.401(a)(9)-6 and 54.4974-2. These regulations can be found in many libraries, IRS offices, and online at IRS.gov. Are Distributions Taxable? In general, distributions from a traditional IRA are taxable in the year you receive them. Failed financial institutions. Distributions from a traditional IRA are taxable in the year you receive them even if they are made 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 roll them over. Exceptions. Exceptions to distributions from traditional IRAs being taxable in the year you receive them are: Rollovers (see chapter 1 of Publication 590-A), Qualified charitable distributions, discussed below, Tax-free withdrawals of contributions (see chapter 1 of Publication 590-A), and The return of nondeductible contributions, discussed later under Distributions Fully or Partly Taxable. Although a conversion of a traditional IRA is con­ sidered a rollover for Roth IRA purposes, it is not CAUTION an exception to the rule that distributions from a traditional IRA are taxable in the year you receive them. Conversion distributions are includible in your gross in­ come subject to this rule and the special rules for conver­ sions explained in chapter 1 of Publication 590­A. ! Qualified charitable distributions. A qualified charitable distribution (QCD) is generally a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax deductible contributions. You must be at least age 70 1 2 when the distribution was made. Also, you must have the same type of acknowledgment of your contribution that you would need to claim a deduction for charitable contribution. See Records To Keep in Publication 526, Charitable Contributions. The maximum annual exclusion for QCDs is $100,000. Any QCD in excess of the $100,000 exclusion limit is included in income as any other distribution. If you file a joint return, your spouse can also have a QCD and exclude up to $100,000. The amount of the QCD is limited to the amount of the distribution that would otherwise be included in income. If your IRA includes nondeductible contributions, the distribution is first considered to be paid out of otherwise taxable income. TIP ! A QCD will count towards your required minimum distribution, discussed earlier. You cannot claim a charitable contribution deduc­ tion for any QCD not included in your income. CAUTION Example. On December 23, 2013, Jeff, age 75, directed the trustee of his IRA to make a distribution of $25,000 directly to a qualified 501(c)(3) organization (a charitable organization eligible to receive tax-deductible contributions). The total value of Jeff's IRA is $30,000 and consists $20,000 of deductible contributions and earnings and $10,000 of nondeductible contributions (basis). Since Jeff is at least age 701 2 and the distribution is made directly by the trustee to a qualified organization, the part of the distribution that would otherwise be includible in Jeff's income ($20,000) is a QCD. In this case, Jeff has made a QCD of $20,000 (his deductible contributions and earnings). Because Jeff made a distribution of nondeductible contributions from his IRA, he must file Form 8606, Nondeductible IRAs, with his return. Jeff includes the total distribution ($25,000) on line 15a of Form 1040. He completes Form 8606 to determine the amount to enter on line 15b of Form 1040 and the remaining basis in his IRA. Jeff enters -0- on line 15b. This is Jeff's only IRA and he took no other distributions in 2013. He also enters “QCD” next to line 15b to indicate a qualified charitable distribution. After the distribution, his basis in his IRA is $5,000. If Jeff itemizes deductions and files Schedule A with Form 1040, the $5,000 portion of the distribution attributable to the nondeductible contributions can be deducted as a charitable contribution, subject to AGI limits. He cannot take charitable contribution deduction for the $20,000 portion of the distribution that was not included in his income. One-time qualified HSA funding distribution. You may be able to make a qualified HSA funding distribution from your traditional IRA or Roth IRA to your Health Savings Account (HSA). You cannot make this distribution from an ongoing SEP IRA or SIMPLE IRA. For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within your tax year in which the distribution would be made. The distribution must be less than or equal to your maximum annual HSA contribution. This distribution must be made directly by the trustee of the IRA to the trustee of the HSA. The distribution is not included in your income, is not deductible, and reduces the amount that can be contributed to your HSA. You must make the distribution by the end of the year; the special rule allowing contributions to your HSA for the previous year if made by your tax return filing deadline does not apply. The qualified HSA funding distribution is reported on Form 8889, Health Savings Accounts, for the year in which the distribution is made. One­time transfer. Generally, only one qualified HSA funding distribution is allowed during your lifetime. If you own two or more IRAs, and want to use amounts in multiple IRAs to make a qualified HSA funding distribution, you must first make an IRA-to-IRA transfer of the amounts to be distributed into a single IRA, and then make the one-time qualified HSA funding distribution from that IRA. Testing period rules apply. If at any time during the testing period you cease to meet all requirements to be an eligible individual, the amount of the qualified HSA funding distribution is included in your gross income. The qualified HSA funding distribution is included in gross income in the taxable year you first fail to be an eligible individual. This amount is subject to the 10 percent additional tax (unless the failure is due to disability or death). More information. See Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, for additional information about this distribution. Chapter 1 Traditional IRAs Page 13 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 retirement 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 Require­ ments for Taxable Amounts, later. Partly taxable. If you made nondeductible contributions or rolled over any after-tax amounts 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 and rolled over after-tax amounts (your cost basis) is tax free. If nondeductible contributions have been made or after-tax amounts have been rolled over to your IRA, 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 or rolled over after-tax amounts to any of your traditional IRAs. Using the form, you will figure the nontaxable distributions for 2014, and your total IRA basis for 2014 and earlier years. See the illustrated Forms 8606 in this chapter. Note. When figuring the nontaxable and taxable amounts of distributions made prior to death in the year the IRA account owner dies, the value of all traditional (including SEP) and SIMPLE IRAs should be figured as of the date of death instead of December 31. Contribution and distribution in the same year. If you received a distribution in 2014 from a traditional IRA and you also made contributions to a traditional IRA for 2014 that may not be fully deductible because of the income limits, you can use Worksheet 1-1 to figure how much of your 2014 IRA distribution is tax free and how much is taxable. Then you can figure the amount of nondeductible contributions to report on Form 8606. Follow the instructions under Reporting your nontaxable distribution on Form 8606, next, to figure your remaining basis after the distribution. 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 Worksheet 1-1 before completing Form 8606. Then follow these steps to complete Form 8606. 1. Use Worksheet 1-2 in chapter 1 of Publication 590-A, or the IRA Deduction Worksheet in the Form 1040, 1040A, or 1040NR instructions to figure your deductible contributions to traditional IRAs to report on Form 1040, line 32; Form 1040A, line 17; or Form 1040NR, line 32. 2. After you complete Worksheet 1-2 in chapter 1 of Publication 590-A or the IRA deduction worksheet in the form instructions, enter your nondeductible contributions to traditional IRAs on line 1 of Form 8606. 3. Complete lines 2 through 5 of Form 8606. 4. If line 5 of Form 8606 is less than line 8 of Worksheet 1-1, complete lines 6 through 15 of Form 8606 and stop here. 5. If line 5 of Form 8606 is equal to or greater than line 8 of Worksheet 1-1, follow instructions 6 and 7, next. Do not complete lines 6 through 12 of Form 8606. 6. Enter the amount from line 8 of Worksheet 1-1 on lines 13 and 17 of Form 8606. 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. 7. Complete line 14 of Form 8606. Figuring the Nontaxable and Taxable Amounts Example. Rose Green has made the following contributions to her traditional IRAs. If your traditional IRA includes nondeductible contributions and you received a distribution from it in 2014, you must use Form 8606 to figure how much of your 2014 IRA distribution is tax free. Page 14 Chapter 1 Traditional IRAs 8. Enter the amount from line 9 of Worksheet 1-1 (or, if you entered an amount on line 11, the amount from that line) on line 15 of Form 8606. Worksheet 1-1. Figuring the Taxable Part of Your IRA Distribution Keep for Your Records Use only if you made contributions to a traditional IRA for 2014 that may not be fully deductible and have to figure the taxable part of your 2014 distributions to determine your modified AGI. See Limit if Covered by Employer Plan in chapter 1 of Publication 590-A. Form 8606 and the related instructions will be needed when using this worksheet. Note. When used in this worksheet, the term outstanding rollover refers to an amount distributed from a traditional IRA as part of a rollover that, as of December 31, 2014, had not yet been reinvested in another traditional IRA, but was still eligible to be rolled over tax free. 1. Enter the basis in your traditional IRAs as of December 31, 2013 ................... 1. 2. Enter the total of all contributions made to your traditional IRAs during 2014 and all contributions made during 2015 that were for 2014, whether or not deductible. Do not include rollover contributions properly rolled over into IRAs. Also, do not include certain returned contributions described in the instructions for line 7, Part I, of Form 8606 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. 3. Add lines 1 and 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 4. Enter the value of all your traditional IRAs as of December 31, 2014 (include any outstanding rollovers from traditional IRAs to other traditional IRAs) . . . . . . . . . . . . . . . . . 4. 5. Enter the total distributions from traditional IRAs (including amounts converted to Roth IRAs that will be shown on line 16 of Form 8606) received in 2014. (Do not include outstanding rollovers included on line 4 or any rollovers between traditional IRAs completed by December 31, 2014. Also, do not include certain returned contributions described in the instructions for line 7, Part I, of Form 8606.) . . . . . . . . . . . . . . . . . . . . . . . . 5. 6. Add lines 4 and 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 7. Divide line 3 by line 6. Enter the result as a decimal (rounded to at least three places). If the result is 1.000 or more, enter 1.000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. 8. Nontaxable portion of the distribution. Multiply line 5 by line 7. Enter the result here and on lines 13 and 17 of Form 8606 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. 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 15 of Form 8606 . . . . . . . . . . . . . . . . 9. 10. Enter the amount included on line 9 that is allocable to amounts converted to Roth IRAs by December 31, 2014. (See Note at the end of this worksheet.) Enter here and on line 18 of Form 8606 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. 11. Taxable portion of the distribution (after adjustments for conversions). Subtract line 10 from line 9. Enter the result here and on line 15 of Form 8606 . . . . . . . . 11. Note. If the amount on line 5 of this worksheet includes an amount converted to a Roth IRA by December 31, 2014, you must determine the percentage of the distribution allocable to the conversion. To figure the percentage, divide the amount converted (from line 16 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 18, Part II of Form 8606, multiply line 9 of the worksheet by the percentage you figured. Year 2007 2008 2009 2010 2011 2012 2013 Totals Deductible 2,000 2,000 2,000 1,000 1,000 1,000 700 $9,700 Nondeductible -0-0-0-0-0-0300 $300 Rose needs to complete Worksheet 1–1. Figuring the Taxable Part of Your IRA Distribution to determine if her IRA deduction for 2014 will be reduced or eliminated. In 2014, she 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 December 31, 2014, and did not recharacterize any contributions. At the end of 2014, 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 2014 is figured on Worksheet 1-1. Figuring the Taxable Part of Your IRA Distribution—Illustrated. The illustrated Form 8606 for Rose shows the information required when you need to use Worksheet 1-1 to figure your nontaxable distribution. Assume that the $500 entered on Form 8606, line 1, is the amount Rose figured using instructions 1 and 2 given earlier under Reporting your nontaxable distribution on Form 8606. Chapter 1 Traditional IRAs Page 15 Worksheet 1-1. Figuring the Taxable Part of Your IRA Distribution—Illustrated Use only if you made contributions to a traditional IRA for 2014 that may not be fully deductible and have to figure the taxable part of your 2014 distributions to determine your modified AGI. See Limit if Covered by Employer Plan in chapter 1 of Publication 590-A. Form 8606 and the related instructions will be needed when using this worksheet. Note. When used in this worksheet, the term outstanding rollover refers to an amount distributed from a traditional IRA as part of a rollover that, as of December 31, 2014, had not yet been reinvested in another traditional IRA, but was still eligible to be rolled over tax free. 1. Enter the basis in your traditional IRAs as of December 31, 2013 ....................... 1. 300 2. Enter the total of all contributions made to your traditional IRAs during 2014 and all contributions made during 2015 that were for 2014, whether or not deductible. Do not include rollover contributions properly rolled over into IRAs. Also, do not include certain returned contributions described in the instructions for line 7, Part I, of Form 8606 . . . . . . . . 2. 2,000 3. Add lines 1 and 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 2,300 4. Enter the value of all your traditional IRAs as of December 31, 2014 (include any outstanding rollovers from traditional IRAs to other traditional IRAs) . . . . . . . . . . . . . . . . . . . . . 4. 20,000 5. Enter the total distributions from traditional IRAs (including amounts converted to Roth IRAs that will be shown on line 16 of Form 8606) received in 2014. (Do not include outstanding rollovers included on line 4 or any rollovers between traditional IRAs completed by December 31, 2014. Also, do not include certain returned contributions described in the instructions for line 7, Part I, of Form 8606.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. 5,000 6. Add lines 4 and 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 25,000 7. Divide line 3 by line 6. Enter the result as a decimal (rounded to at least three places). If the result is 1.000 or more, enter 1.000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. .092 8. Nontaxable portion of the distribution. Multiply line 5 by line 7. Enter the result here and on lines 13 and 17 of Form 8606 . . . . . . . . 8. 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 15 of Form 8606 . . . . . . . . . . . . . . . . . . . . . . 9. 4,540 10. Enter the amount included on line 9 that is allocable to amounts converted to Roth IRAs by December 31, 2014. (See Note at the end of this worksheet.) Enter here and on line 18 of Form 8606 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. 4,540 11. Taxable portion of the distribution (after adjustments for conversions). Subtract line 10 from line 9. Enter the result here and on line 15 of Form 8606 . . . . . . . . . . . . 11. 0 Note. If the amount on line 5 of this worksheet includes an amount converted to a Roth IRA by December 31, 2014, you must determine the percentage of the distribution allocable to the conversion. To figure the percentage, divide the amount converted (from line 16 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 18, Part II of Form 8606, multiply line 9 of the worksheet by the percentage you figured. Page 16 Chapter 1 Traditional IRAs Form 8606 Nondeductible IRAs OMB No. 1545-0074 Attach to Form 1040, Form 1040A, or Form 1040NR. Attachment Sequence No. 48 Your social security number Name. If married, file a separate form for each spouse required to file Form 8606. See instructions. 001-00-0000 Rose Green Home address (number and street, or P.O. box if mail is not delivered to your home) Fill in Your Address Only If You Are Filing This Form by Itself and Not With Your Tax Return Part I 2014 Information about Form 8606 and its separate instructions is at www.irs.gov/form8606. Department of the Treasury Internal Revenue Service (99) Apt. no. City, town or post office, state, and ZIP code. If you have a foreign address, also complete the spaces below. Foreign country name Foreign province/state/county Foreign postal code Nondeductible Contributions to Traditional IRAs and Distributions From Traditional, SEP, and SIMPLE IRAs Complete this part only if one or more of the following apply. and you made nondeductible contributions to a distribution to fund an HSA, conversion, recharacterization, or return of certain contributions. you recharacterized) and 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 your nondeductible contributions to traditional IRAs for . . . . . . In 2014, did you take a distribution from traditional, SEP, or SIMPLE IRAs, or make a Roth IRA conversion? . . . . . . . the value of all your traditional, . . No . . . . . and . . including those made for . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3 500 300 800 . 4 5 0 800 13 14 460* 340 15 0 Do not complete the rest of Part I. Go to line 4. Yes . . . . . . . . . . . . . . . IRAs as of . . 6 your distributions from traditional, and IRAs in Do not include rollovers, a one-time distribution to fund an HSA, conversions to a Roth IRA, certain returned contributions, or recharacterizations of traditional IRA contributions (see instructions) . 7 the net amount you converted from traditional, and IRAs to Roth IRAs in Do not include amounts converted that you later recharacterized (see instructions). Also enter this amount on line 16 . Add lines 6, 7, and 8 . . . . . . . . 9 Divide line 5 by line 9. the result as a decimal rounded to at least . . . . . . Multiply line 8 by line 10. This is the nontaxable portion of the amount you converted to Roth IRAs. Also enter this amount on line 17 . . . Multiply line 7 by line 10. This is the nontaxable portion of your distributions that you did not convert to a Roth IRA . . . . . . . . . . . . . 8 10 × . 11 12 . . . . . . . . your total basis in traditional IRAs for 2014 and earlier years Taxable amount. Subtract line from line 7. If more than zero, also include this amount on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b . . . . . . . . . . . . Note. may be subject to an additional 10% tax on the amount on line 15 if you were under age 59½ at the time of the distribution (see instructions). Form 8606 For Privacy Act and Paperwork Reduction Act Notice, see separate instructions. * From Worksheet 1 - 1 in Publication 590-B Chapter 1 Traditional IRAs Page 17 Page 2 Form 8606 (2014) Part II 2014 Conversions From Traditional, SEP, or SIMPLE IRAs to Roth IRAs Complete this part if you converted part or all of your traditional, SEP, and SIMPLE IRAs to a Roth IRA in 2014 (excluding any portion you recharacterized). 16 17 18 If you completed Part I, enter the amount from line 8. Otherwise, enter the net amount you converted from traditional, SEP, and SIMPLE IRAs to Roth IRAs in 2014. Do not include amounts you later recharacterized back to traditional, SEP, or SIMPLE IRAs in 2014 or 2015 (see instructions) If you completed Part I, enter the amount from line 11. Otherwise, enter your basis in the amount on line 16 (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . Taxable amount. Subtract line 17 from line 16. If more than zero, also include this amount on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b . . . . . . . . . . Part III Distributions From Roth IRAs 16 5,000 17 460 18 4,540* Complete this part only if you took a distribution from a Roth IRA in 2014. For this purpose, a distribution does not include a rollover, one-time distribution to fund an HSA, recharacterization, or return of certain contributions (see instructions). 19 Enter your total nonqualified distributions from Roth IRAs in 2014, including any qualified first-time homebuyer distributions (see instructions) . . . . . . . . . . . . . . . . . . . 19 20 Qualified first-time homebuyer expenses (see instructions). Do not enter more than $10,000 . . 20 21 Subtract line 20 from line 19. If zero or less, enter -0- . . . . . . . . . . . . . . . . 21 22 22 Enter your basis in Roth IRA contributions (see instructions). If line 21 is zero, stop here . . . . 23 Subtract line 22 from line 21. If zero or less, enter -0- and skip lines 24 and 25. If more than zero, you may be subject to an additional tax (see instructions) . . . . . . . . . . . . . . 23 24 Enter your basis in conversions from traditional, SEP, and SIMPLE IRAs and rollovers from qualified retirement plans to a Roth IRA (see instructions) . . . . . . . . . . . . . . 24 25 Taxable amount. Subtract line 24 from line 23. If more than zero, also include this amount on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b . . . . . . . . . . 25 Sign Here Only If You Under penalties of perjury, I declare that I have examined this form, including accompanying attachments, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. Are Filing This Form by Itself and Not With Your Tax Return Date Your signature Paid Preparer Use Only Print/Type preparer’s name Preparer’s signature Date Check if PTIN self-employed Firm's name Firm's EIN Firm's address Phone no. Form 8606 (2014) *From Worksheet 1 - 1 in Publication 590-B Page 18 Chapter 1 Traditional IRAs Recognizing Losses on Traditional IRA Investments If you have a loss on your traditional IRA investment, you can recognize (include) 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%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040). Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax. Example. Bill King has made nondeductible contributions to a traditional IRA totaling $2,000, giving him a basis at the end of 2013 of $2,000. By the end of 2014, 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 2015, 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 2015 of $200 (the $1,500 basis minus the $1,300 distribution of the IRA balance). Chapter 1 Traditional IRAs Page 19 Form 8606 Nondeductible IRAs OMB No. 1545-0074 2014 Information about Form 8606 and its separate instructions is at www.irs.gov/form8606. Department of the Treasury Internal Revenue Service (99) Attach to Form 1040, Form 1040A, or Form 1040NR. Attachment Sequence No. 48 Your social security number Name. If married, file a separate form for each spouse required to file Form 8606. See instructions. Bill King 002-00-0000 Home address (number and street, or P.O. box if mail is not delivered to your home) Fill in Your Address Only If You Are Filing This Form by Itself and Not With Your Tax Return Part I Apt. no. City, town or post office, state, and ZIP code. If you have a foreign address, also complete the spaces below. Foreign country name Foreign province/state/county Foreign postal code Nondeductible Contributions to Traditional IRAs and Distributions From Traditional, SEP, and SIMPLE IRAs Complete this part only if one or more of the following apply. and you made nondeductible contributions to a distribution to fund an HSA, conversion, recharacterization, or return of certain contributions. you recharacterized) and 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 your nondeductible contributions to traditional IRAs for . . . . . . In 2014, did you take a distribution from traditional, SEP, or SIMPLE IRAs, or make a Roth IRA conversion? . . . . . . . the value of all your traditional, . . No . . . . . and . . including those made for . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IRAs as of . . 6 your distributions from traditional, and IRAs in Do not include rollovers, a one-time distribution to fund an HSA, conversions to a Roth IRA, certain returned contributions, or recharacterizations of traditional IRA contributions (see instructions) . 7 the net amount you converted from traditional, and IRAs to Roth IRAs in Do not include amounts converted that you later recharacterized (see instructions). Also enter this amount on line 16 . Add lines 6, 7, and 8 . . . . . . . . 9 2,400 Divide line 5 by line 9. the result as a decimal rounded to at least . . . . . . Multiply line 8 by line 10. This is the nontaxable portion of the amount you converted to Roth IRAs. Also enter this amount on line 17 . . . Multiply line 7 by line 10. This is the nontaxable portion of your distributions that you did not convert to a Roth IRA . . . . . . . 1 2 3 0 2,000 2,000 . . . . . . . 4 5 0 2,000 13 14 500 1,500 15 100 1,800 600 8 10 × . 833 11 12 500 . . . . . . . . your total basis in traditional IRAs for 2014 and earlier years Taxable amount. Subtract line from line 7. If more than zero, also include this amount on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b . . . . . . . . . . . . Note. may be subject to an additional 10% tax on the amount on line 15 if you were under age 59½ at the time of the distribution (see instructions). For Privacy Act and Paperwork Reduction Act Notice, see separate instructions. Page 20 . . . Do not complete the rest of Part I. Go to line 4. Yes . . . . . . Chapter 1 Traditional IRAs Form 8606 Other Special IRA Distribution Situations Two other special IRA distribution situations are discussed next. 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 (unless the annuity contract is being converted to an annuity held by a Roth IRA). 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 opened (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. Unless you have already cashed them in, you will be taxed on the entire value of your bonds in the year in which you reach age 701 2. The value of the bonds is the amount you would have received if you had cashed them in at the end of that year. When you later cash in the bonds, 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 2a 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 of 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 2014. If code 1, 5, or 8 appears on your Form 1099­R, you are probably subject to a penalty or addi­ CAUTION tional tax. If code 1 appears, see Early Distributions, later. If code 5 appears, see Prohibited Transactions, later. If code 8 appears, see Excess Contributions in chapter 1 of Publication 590­A. ! Letter codes. Some of the letter codes are explained below. All of the codes are explained in the instructions for recipients on Form 1099-R. B—Designated Roth account distribution. G—Direct rollover of a distribution (other than a designated Roth account distribution) to a qualified plan, a section 403(b) plan, a governmental section 457(b) plan, or an IRA. H—Direct rollover of a designated Roth account distribution to a Roth IRA. J—Early distribution from a Roth IRA. N—Recharacterized IRA contribution made for 2014 and recharacterized in 2014. P—Excess contributions plus earnings/ excess deferrals taxable in 2013. Q—Qualified distribution from a Roth IRA. R—Recharacterized IRA contribution made for 2013 and recharacterized in 2014. S—Early distribution from a SIMPLE IRA in the first 2 years, no known exception. T—Roth IRA distribution, exception applies. 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.” If code J, P, or S appears on your Form 1099­R, you are probably subject to a penalty or addi­ CAUTION tional tax. If code J appears, see Early Distributions, later. If code P appears, see Excess Contributions in chapter 1 of Publication 590­A. If code S appears, see Distributions (Withdrawals) in chapter 3 of Publication 560. ! 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 nonperiodic distributions. 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. Chapter 1 Traditional IRAs Page 21 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 on withholding on pensions and annuities, see Pensions and Annui­ ties in chapter 1 of Publication 505, Tax Withholding and Estimated Tax. For more information on withholding on nonresident aliens and foreign entities, see Pensions, An­ nuities, and Alimony under Withholding on Specific In­ come in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. Reporting taxable distributions on your return. Report fully taxable distributions, including early distributions, on Form 1040, line 15b (no entry is required on line 15a); Form 1040A, line 11b (no entry is required on line 11a); or Form 1040NR, line 16b (no entry is required on line 16a). If only part of the distribution is taxable, enter the total amount on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a, and enter the taxable part on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. You cannot report distributions on Form 1040EZ or Form 1040NR-EZ. 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 Schedule I, Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. What Acts Result in Penalties or Additional Taxes? The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you do not follow the rules. There are additions to the regular tax for using your IRA funds in prohibited transactions. There are also additional taxes for the following activities. Investing in collectibles. Making excess contributions. Taking early distributions. Allowing excess amounts to accumulate (failing to take required distributions). There are penalties for overstating the amount of nondeductible contributions and for failure to file Form 8606, if required. This chapter discusses those acts (relating to distributions) that you should avoid and the additional taxes and Page 22 Chapter 1 Traditional IRAs other costs, including loss of IRA status, that apply if you do not avoid those acts. Prohibited Transactions Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person. Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant). The following are some examples of prohibited transactions with a traditional IRA. Borrowing money from it. Selling property to it. Using it as security for a loan. Buying property for personal use (present or future) with IRA funds. If your IRA invested in nonpublicly traded assets or assets that you directly control, the risk of en­ CAUTION gaging in a prohibited transaction in connection with your IRA may be increased. ! Fiduciary. For these purposes, a fiduciary includes anyone who does any of the following. Exercises any discretionary authority or discretionary control in managing your IRA or exercises any authority or control in managing or disposing of its assets. Provides investment advice to your IRA for a fee, or has any authority or responsibility to do so. Has any discretionary authority or discretionary responsibility in administering your IRA. Effect on an IRA account. Generally, if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year. Effect on you or your beneficiary. If your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to you at their fair market values on the first day of the year. If the total of those values is more than your basis in the IRA, you will have a taxable gain that is includible in your income. For information on figuring your gain and reporting it in income, see Are Dis­ tributions Taxable, earlier. The distribution may be subject to additional taxes or penalties. Borrowing on an annuity contract. If you borrow money against your traditional IRA annuity contract, you must include in your gross income the fair market value of the annuity contract as of the first day of your tax year. You may have to pay the 10% additional tax on early distributions, discussed later. Pledging an account as security. If you use a part of your traditional IRA account as security for a loan, that part is treated as a distribution and is included in your gross income. You may have to pay the 10% additional tax on early distributions, discussed later. Trust account set up by an employer or an employee association. Your account or annuity does not lose its IRA treatment if your employer or the employee association with whom you have your traditional IRA engages in a prohibited transaction. Owner participation. If you participate in the prohibited transaction with your employer or the association, your account is no longer treated as an IRA. Taxes on prohibited transactions. If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. In general, there is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if the transaction is not corrected. Loss of IRA status. If the traditional IRA ceases to be an IRA because of a prohibited transaction by you or your beneficiary, you or your beneficiary are not liable for these excise taxes. However, you or your beneficiary may have to pay other taxes as discussed under Effect on you or your beneficiary, earlier. Exempt Transactions The following two types of transactions are not prohibited transactions if they meet the requirements that follow. Payments of cash, property, or other consideration by the sponsor of your traditional IRA to you (or members of your family). Your receipt of services at reduced or no cost from the bank where your traditional IRA is established or maintained. Payments of cash, property, or other consideration. Even if a sponsor makes payments to you or your family, there is no prohibited transaction if all three of the following requirements are met. 1. The payments are for establishing a traditional IRA or for making additional contributions to it. 2. The IRA is established solely to benefit you, your spouse, and your or your spouse's beneficiaries. 3. During the year, the total fair market value of the payments you receive is not more than: Services received at reduced or no cost. Even if a sponsor provides services at reduced or no cost, there is no prohibited transaction if all of the following requirements are met. The traditional IRA qualifying you to receive the services is established and maintained for the benefit of you, your spouse, and your or your spouse's beneficiaries. The bank itself can legally offer the services. The services are provided in the ordinary course of business by the bank (or a bank affiliate) to customers who qualify but do not maintain an IRA (or a Keogh plan). The determination, for a traditional IRA, of who qualifies for these services is based on an IRA (or a Keogh plan) deposit balance equal to the lowest qualifying balance for any other type of account. The rate of return on a traditional IRA investment that qualifies is not less than the return on an identical investment that could have been made at the same time at the same branch of the bank by a customer who is not eligible for (or does not receive) these services. Investment in Collectibles If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. You may have to pay the 10% additional tax on early distributions, discussed later. Any amounts that were considered to be distributed when the investment in the collectible was made, and which were included in your income at that time, are not included in your income when the collectible is actually distributed from your IRA. Collectibles. These include: Artworks, Rugs, Antiques, Metals, Gems, Stamps, Coins, a. $10 for IRA deposits of less than $5,000, or Alcoholic beverages, and b. $20 for IRA deposits of $5,000 or more. Certain other tangible personal property. If the consideration is group term life insurance, requirements (1) and (3) do not apply if no more than $5,000 of the face value of the insurance is based on a dollar-for-dollar basis on the assets in your IRA. Exception. Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion. Chapter 1 Traditional IRAs Page 23 Early Distributions You use the distributions to buy, build, or rebuild a first home. You must include early distributions of taxable amounts from your traditional IRA in your gross income. Early distributions are also subject to an additional 10% tax, as discussed later. The distribution is due to an IRS levy of the qualified plan. Early distributions defined. Early distributions generally are amounts distributed from your traditional IRA account or annuity before you are age 591 2, or amounts you receive when you cash in retirement bonds before you are age 591 2. Age 591 2 Rule Generally, if you are under age 591 2, you must pay a 10% additional tax on the distribution of any assets (money or other property) from your traditional IRA. Distributions before you are age 591 2 are called early distributions. The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount. A number of exceptions to this rule are discussed later under Exceptions. Also see Contributions Returned Be­ fore Due Date of Return in chapter 1 of Publication 590-A. You may have to pay a 25%, rather than a 10%, additional tax if you receive distributions from a CAUTION SIMPLE IRA before you are age 591 2. See Distributions (Withdrawals) in chapter 3 of Publication 560. ! After age 591 2 and before age 701 2. After you reach age 591 2, you can receive distributions without having to pay the 10% additional tax. Even though you can receive distributions after you reach age 591 2, distributions are not required until you reach age 701 2. See When Must You With­ draw Assets? (Required Minimum Distributions), earlier. Exceptions There are several exceptions to the age 591 2 rule. Even if you receive a distribution before you are age 591 2, you may not have to pay the 10% additional tax if you are in one of the following situations. You have unreimbursed medical expenses that are more than 10% (or 7.5% if you or your spouse was born before January 2, 1950) of your adjusted gross income. The distributions are not more than the cost of your medical insurance due to a period of unemployment. You are totally and permanently disabled. You are the beneficiary of a deceased IRA owner. You are receiving distributions in the form of an annuity. The distributions are not more than your qualified higher education expenses. Page 24 Chapter 1 Traditional IRAs The distribution is a qualified reservist distribution. Most of these exceptions are explained below. Note. Distributions that are timely and properly rolled over, as discussed in chapter 1 of Publication 590-A, are not subject to either regular income tax or the 10% additional tax. Certain withdrawals of excess contributions after the due date of your return are also tax free and therefore not subject to the 10% additional tax. (See Excess Contributions Withdrawn After Due Date of Return, in chapter 1 of Publication 590-A.) This also applies to transfers incident to divorce, as discussed under Can You Move Retirement Plan Assets in chapter 1 of Publication 590-A. Receivership distributions. Early distributions (with or without your consent) from savings institutions placed in receivership are subject to this tax unless one of the above exceptions applies. This is true even if the distribution is from a receiver that is a state agency. Unreimbursed medical expenses. Even if you are under age 591 2, you do not have to pay the 10% additional tax on distributions that are not more than: The amount you paid for unreimbursed medical expenses during the year of the distribution, minus 10% (or 7.5% if you or your spouse was born before January 2, 1950) of your adjusted gross income (defined next) for the year of the distribution. You can only take into account unreimbursed medical expenses that you would be able to include in figuring a deduction for medical expenses on Schedule A (Form 1040). You do not have to itemize your deductions to take advantage of this exception to the 10% additional tax. Adjusted gross income. This is the amount on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37. Medical insurance. Even if you are under age 591 2, you may not have to pay the 10% additional tax on distributions during the year that are not more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply. You lost your job. You received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job. You receive the distributions during either the year you received the unemployment compensation or the following year. You receive the distributions no later than 60 days after you have been reemployed. Disabled. If you become disabled before you reach age 591 2, any distributions from your traditional IRA because of your disability are not subject to the 10% additional tax. You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration. Beneficiary. If you die before reaching age 591 2, the assets in your traditional IRA can be distributed to your beneficiary or to your estate without either having to pay the 10% additional tax. However, if you inherit a traditional IRA from your deceased spouse and elect to treat it as your own (as discussed under What if You Inherit an IRA, earlier), any distribution you later receive before you reach age 591 2 may be subject to the 10% additional tax. Annuity. You can receive distributions from your traditional IRA that are part of a series of substantially equal payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary, without having to pay the 10% additional tax, even if you receive such distributions before you are age 591 2. You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply. The “required minimum distribution method,” when used for this purpose, results in the exact amount required to be distributed, not the minimum amount. There are two other IRS-approved distribution methods that you can use. They are generally referred to as the “fixed amortization method” and the “fixed annuitization method.” These two methods are not discussed in this publication because they are more complex and generally require professional assistance. For information on these methods, see Revenue Ruling 2002-62, which is on page 710 of Internal Revenue Bulletin 2002-42 at www.irs.gov/pub/irs­irbs/irb02­42.pdf. Recapture tax for changes in distribution method under equal payment exception. You may have to pay an early distribution recapture tax if, before you reach age 591 2, the distribution method under the equal periodic payment exception changes (for reasons other than your death or disability). The tax applies if the method changes from the method requiring equal payments to a method that would not have qualified for the exception to the tax. The recapture tax applies to the first tax year to which the change applies. The amount of tax is the amount that would have been imposed had the exception not applied, plus interest for the deferral period. You may have to pay the recapture tax if you do not receive the payments for at least 5 years under a method that qualifies for the exception. You may have to pay it even if you modify your method of distribution after you reach age 591 2. In that case, the tax applies only to payments distributed before you reach age 591 2. Report the recapture tax and interest on line 4 of Form 5329. Attach an explanation to the form. Do not write the explanation next to the line or enter any amount for the recapture on lines 1 or 3 of the form. One­time switch. If you are receiving a series of substantially equal periodic payments, you can make a one-time switch to the required minimum distribution method at any time without incurring the additional tax. Once a change is made, you must follow the required minimum distribution method in all subsequent years. Higher education expenses. Even if you are under age 591 2, if you paid expenses for higher education during the year, part (or all) of any distribution may not be subject to the 10% additional tax. The part not subject to the tax is generally the amount that is not more than the qualified higher education expenses (defined next) for the year for education furnished at an eligible educational institution (defined below). The education must be for you, your spouse, or the children or grandchildren of you or your spouse. When determining the amount of the distribution that is not subject to the 10% additional tax, include qualified higher education expenses paid with any of the following funds. Payment for services, such as wages. A loan. A gift. An inheritance given to either the student or the individual making the withdrawal. A withdrawal from personal savings (including savings from a qualified tuition program). Do not include expenses paid with any of the following funds. Tax-free distributions from a Coverdell education savings account. Tax-free part of scholarships and fellowships. Pell grants. Employer-provided educational assistance. Veterans' educational assistance. Any other tax-free payment (other than a gift or inheritance) received as educational assistance. Qualified higher education expenses. Qualified higher education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, room and board are qualified higher education expenses. Chapter 1 Traditional IRAs Page 25 Eligible educational institution. This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution. For more information, see chapter 9 of Publication 970, Tax Benefits for Education. First home. Even if you are under age 59 , you do not have to pay the 10% additional tax on up to $10,000 of distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements. 1 2 1. It must be used to pay qualified acquisition costs (defined next) before the close of the 120th day after the day you received it. 2. It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer (defined below) who is any of the following. a. Yourself. If you received a distribution to buy, build, or re­ build a first home and the purchase or construc­ tion was canceled or delayed, you generally can contribute the amount of the distribution to an IRA within 120 days of the distribution. This contribution is treated as a rollover contribution to the IRA. TIP Qualified reservist distributions. A qualified reservist distribution is not subject to the additional tax on early distributions. Definition. A distribution you receive is a qualified reservist distribution if the following requirements are met. You were ordered or called to active duty after September 11, 2001. You were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a reserve component. The distribution is from an IRA or from amounts attributable to elective deferrals under a section 401(k) or 403(b) plan or a similar arrangement. The distribution was made no earlier than the date of the order or call to active duty and no later than the close of the active duty period. Reserve component. The term “reserve component” means the: b. Your spouse. c. Your or your spouse's child. Army National Guard of the United States, d. Your or your spouse's grandchild. Army Reserve, e. Your or your spouse's parent or other ancestor. 3. When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000. If both you and your spouse are first­time home­ TIP buyers (defined later), each of you can receive distributions up to $10,000 for a first home with­ out having to pay the 10% additional tax. Qualified acquisition costs. Qualified acquisition costs include the following items. Costs of buying, building, or rebuilding a home. Any usual or reasonable settlement, financing, or other closing costs. First­time homebuyer. Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement. Date of acquisition. The date of acquisition is the date that: You enter into a binding contract to buy the main home for which the distribution is being used, or The building or rebuilding of the main home for which the distribution is being used begins. Page 26 Chapter 1 Traditional IRAs Naval Reserve, Marine Corps Reserve, Air National Guard of the United States, Air Force Reserve, Coast Guard Reserve, or Reserve Corps of the Public Health Service. Additional 10% tax The additional tax on early distributions is 10% of the amount of the early distribution that you must include in your gross income. This tax is in addition to any regular income tax resulting from including the distribution in income. Use Form 5329 to figure the tax. See the discussion of Form 5329, later, under Reporting Additional Taxes for information on filing the form. Example. Tom Jones, who is 35 years old, receives a $3,000 distribution from his traditional IRA account. Tom does not meet any of the exceptions to the 10% additional tax, so the $3,000 is an early distribution. Tom never made any nondeductible contributions to his IRA. He must include the $3,000 in his gross income for the year of the distribution and pay income tax on it. Tom must also pay an additional tax of $300 (10% × $3,000). He files Form 5329. See the filled-in Form 5329, later. Early distributions of funds from a SIMPLE retire­ ment account made within 2 years of beginning CAUTION participation in the SIMPLE are subject to a 25%, rather than a 10%, early distributions tax. ! Nondeductible contributions. The tax on early distributions does not apply to the part of a distribution that represents a return of your nondeductible contributions (basis). Excess Accumulations (Insufficient Distributions) You cannot keep amounts in your traditional IRA indefinitely. Generally, you must begin receiving distributions by April 1 of the year following the year in which you reach age 701 2. The required minimum distribution for any year after the year in which you reach age 701 2 must be made by December 31 of that later year. Tax on excess. If distributions are less than the required minimum distribution for the year, discussed earlier under When Must You Withdraw Assets? (Required Mini­ mum Distributions), you may have to pay a 50% excise tax for that year on the amount not distributed as required. Reporting the tax. Use Form 5329 to report the tax on excess accumulations. See the discussion of Form 5329, later, under Reporting Additional Taxes, for more information on filing the form. Request to waive the tax. If the excess accumulation 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 waived. If you believe you qualify for this relief, attach a statement of explanation and complete Form 5329 as instructed under Waiver of tax in the Instructions for Form 5329. Exemption from tax. If you are unable to take required distributions because you have a traditional IRA invested in a contract issued by an insurance company that is in state insurer delinquency proceedings, the 50% excise tax does not apply if the conditions and requirements of Revenue Procedure 92-10 are satisfied. Those conditions and requirements are summarized below. Revenue Procedure 92-10 is in Cumulative Bulletin 1992-1. You can read the revenue procedure at most IRS offices, at many public libraries, and online at IRS.gov. Conditions. To qualify for exemption from the tax, the assets in your traditional IRA must include an affected investment. Also, the amount of your required distribution must be determined as discussed earlier under When Must You Withdraw Assets? (Required Minimum Distribu­ tions). Affected investment defined. Affected investment means an annuity contract or a guaranteed investment contract (with an insurance company) for which payments under the terms of the contract have been reduced or suspended because of state insurer delinquency proceedings against the contracting insurance company. Requirements. If your traditional IRA (or IRAs) includes assets other than your affected investment, all traditional IRA assets, including the available portion of your affected investment, must be used to satisfy as much as possible of your IRA distribution requirement. If the affected investment is the only asset in your IRA, as much of the required distribution as possible must come from the available portion, if any, of your affected investment. Chapter 1 Traditional IRAs Page 27 Form 5329 Department of the Treasury Internal Revenue Service (99) Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts Fill in Your Address Only If You Are Filing This Form by Itself and Not With Your Tax Return 2014 Attach to Form 1040 or Form 1040NR. Attachment Sequence No. 29 Information about Form 5329 and its separate instructions is at www.irs.gov/form5329. Your social security number Name of individual subject to additional tax. If married filing jointly, see instructions. Tom Jones OMB No. 1545-0074 004-00-0000 Home address (number and street), or P.O. box if mail is not delivered to your home City, town or post office, state, and ZIP code. If you have a foreign address, also complete the spaces below (see instructions). Foreign country name Foreign province/state/county Apt. no. If this is an amended return, check here Foreign postal code If you only owe the additional 10% tax on early distributions, you may be able to report this tax directly on Form 1040, line 59, or Form 1040NR, line 57, without filing Form 5329. See the instructions for Form 1040, line 59, or for Form 1040NR, line 57. Part I 1 2 3 4 Part II 5 6 7 8 Additional Tax on Early Distributions Complete this part if you took a taxable distribution before you reached age 59½ from a qualified retirement plan (including an IRA) or modified endowment contract (unless you are reporting this tax directly on Form 1040 or Form 1040NR—see above). You may also have to complete this part to indicate that you qualify for an exception to the additional tax on early distributions or for certain Roth IRA distributions (see instructions). 3000 Early distributions included in income. For Roth IRA distributions, see instructions . . . . . . 1 Early distributions included on line 1 that are not subject to the additional tax (see instructions). Enter the appropriate exception number from the instructions: . . . . . . . . . 2 -03000 Amount subject [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A00d3de7993899368. Public record. Not legal advice.