IRA Rules

Posts Tagged ‘ira distribution rules’

Question: Is an IRA distribution considered “investment income” as defined under Earned Income Tax Credit rules ?

To qualify for the earned income tax credit, your “investment income” must be below a certain amount. Is an IRA distribution considered to be part of this “investment income” ??
$ so fresh – you didn’t answer my specific question.
$so fresh – thanks for the new information.. you have now answered my question.
vb – thanks for your excellent and very helpful answer.

Answer: On 1040a, an IRA distribution is shown on line 11 *and* line in the agi on line 21.

In the 1040a instructions, the investment income worksheet specifically skips line 11.

However, the calculation of the EIC takes the agi into account, so a large amount of IRA money can lower the EIC (it would never raise it).

Retirement Planning : How Do IRA Distributions Work?

What are the Roth IRA distribution rules for tax purposes?

Qualified distributions from a Roth IRA are not taxable and therefore you will not include them in the gross income on your tax return. 

What is a qualified Roth IRA distribution?

A qualified Roth IRA distribution is any payment of distribution that meets the following requirements. 

• It is made after the 5 year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and

A distribution is not a qualified Roth IRA distribution if you receive it within the 5 taxable year period or you withdraw excess contributions or earnings on it before the duet date of your return. 

What is the tax penalty on Roth IRA distributions?

A 10% additional tax is imposed on premature taxable distributions. Each conversion will have a separate 5 taxable year period before it is qualified. 

It is important to remember that with Roth IRAs you can always have your original contributions distributed tax free even if the distribution is not qualified. 

Example of Roth IRA Distribution Rules at work

You contributed $3,000 to y our Roth IRA in both 2003 and 2004. In 2006, you took a distribution of $6,200. The amount taxable (and potentially subject to the 10% additional tax) is $200 ($6,200- $6,000). Had you withdrawn only $6,000 then none of the distribution from your Roth IRA would have been taxable nor subject to the 10% additional tax.

Question: How do you resolve a bank tax reporting error for a qualified distribution from a Roth IRA?

I took a qualified early Roth IRA distribution as a first time homebuyer in 2006. What happens if my bank incorrectly codes this transaction as non-qualified? Will the IRS understand what actually happened?

Answer: The bank will assume you made a distribution from your Roth IRA period. It is up to you to justify to the irs that it is not taxable. You do this by filing the proper forms with your tax return (attached to it)

5329 This tells the IRS that you are or are not subject to the 10% early withdrawal penalty because you are under 59 1/2 or why you are exempt if you are a first time home buyer taking out up to $10,000

8606 (page 2, part III lines 19-25) This tells the IRS how much of the distribution is basis reduction and how much is taxable income.

Do not forget on a roth, you get your basis back then you have taxable income, unless you contributed the funds in the last 5 years. First time home buys can take $10,000 off

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