In 2008, client took a full distribution of an Individual Retirement Annuity set up in 2002. Original amt: $16M. No subsequent contributions or distributions until now. Initial amt should be tax free with only the interest being taxable. Agree? Do I need form 8606?
16 million for an IRA? Maybe that M somehow means thousand. Regardless:
If you put money into an IRA and deducted it, you pay tax from the get-go on the way out.
If you had done an 8606 when you put the money in each year on a non-deductible basis (or have
something showing from the broker that it's non-deductible) and if there are no other IRA's or
SEP's but only this one completely-non-deductible IRA, then 100% of the initial basis gets used up first, and only the last, growth, distributions become taxable.
What type of IRA - Deductable, Non-Deductable or RITH? IRS has Pub 590
Amy2008 - taxpayer assures me the money came from personal after-tax savings and no deductions were ever taken. An amendment endorsement attached to the Annuity contract shows an election to be issued as an Individual Retirement Annuity. They have never done an 8606 before. They do have another Rollover IRA funded by an employee stock purchase plan with a partial distribution taken that will be fully taxable.
Jay in Georgia - the IRA is an Individual Retirement Annuity for tax purposes. No contributions beyond the original investment. Not a Roth. Without the IRA endorsement, it would be a just a plain non-qualified commercial annuity contract.
You have to go thru a lot of math when you take money out of EITHER of the IRA's, since PART of the total IRA's is non-deductible. I would also issue a statement with the return to the effect that even though you didn't do 8606's in the years when the $16,000 was funded, you took no deductions and you have basis of $16,000. If taxpayer knows which years those were, mention the years, so much the better.
On screen 13, in one of the IRA's (not both) you have to put the year-end values of both IRA's added together. In screen 24 you have to put the basis (the $16,000) from before 1/1/08.
What will happen, is that money taken out of both IRA's gets calculated on this year's 8606 to show how much wound up being taxed, and how much basis remains. The fact that one of the IRA's was originally funded with all non-deducted money, and the other was originally funded with all-deducted money, does not matter.
I see your point. Not the best out come for the TP but right is right. One more consideration: the original amount of the annuity was $16K. Pub 590 chapter 1 indicates that the amount of the contribution cannot exceed $6,000 for 50 and older in 2008 (this would have been $3,000 in 2002), and if the it exceeds that, the annuity or endowment is disqualified. Does this apply to the initial investment and if so, should this not qualify as an IRA?
It doesn't mean that it wasn't an IRA at all. It means he made excess contributions. Excise tax, calculated at 6% of the disallowed amount per year, are due.
What you need are Forms 8606 and 5329 (both of which can be filed free-standing, rather than with a 1040), starting in 2002.
2002: ND contribution of $3,000 (no tax consequence), excess of $13,000 ($780 excise tax due)
2003: ND contribution of $3,000 (no tax consequence), excess of $10,000 ($600 excise tax due)
2004: ND contribution of $3,000 (no tax consequence), excess of $8,000 ($420 excise tax due)
2005: ND contribution of $4,000 (no tax consequence), excess of $2,000 ($120 excise tax due)
2006: ND contribution of $2,000 (no tax consequence)
If he was over age 50 in all years, it would look like:
2002 3500 12500 750
2003 3500 9000 540
2004 3500 5500 330
2005 4500 1000 60
Then you mail them all in with the check for $1,920 plus interest and penalties.
PheobeRoberts - thank you so much for doing the math! Your conclusions are very logical. I just cannot understand why a TP would enter into an Individual Retirement Annuity (at age 62) knowing that they are subject to these excise taxes and penalties at distribution. I do not believe for a minute that they knew or intended to make an excess IRA contribution at inception, or even knew they were getting an IRA. Looks like another a case of seniors being taken advantage of by an aggressive broker or agent. But I guess that's not our concern. Unless you know of any alternative options, I will deliver the knews. Thanks again.
Excel and copy-paste are my friends. :) (Oh, and I assumed he had sufficient earned income each year.)
In the situation you've described, I would prepare the 8606s and 5329s, then attach a letter requesting that the excise tax be waived. I don't know that the IRS has the discretion to waive it, but I'd trot out every excuse I could reasonably come up with: age, ill health, family upheaval, lack of understanding of what was being bought, bad advice from the person selling it, didn't have anyone to get good advice from, thought he was getting an NQ annuity, never took a deduction, etc. He didn't mean to do it. He'll never do it again. He now has a nice qualified tax advisor working with him to keep him on the straight and narrow. We respectfully request that you waive the additional tax on excess contributions, due to reasonable cause. Don't send money with it. Wait for the IRS to either send a bill, or not send a bill.
If they send a bill, pay the tax and interest, and attach the same letter as above, modified to end with "We respectfully request that you waive the penalties, due to reasonable cause."
You're welcome! Feel free to mark as helpful any responses that were. :)
