Discussion:Tracking Roth Basis
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Discussion Forum Index --> Advanced Tax Questions --> Tracking Roth Basis
Discussion Forum Index --> Tax Questions --> Tracking Roth Basis
| 23 May 2008 | |
| My interpretation of Sec. 408A(d)(4) and Reg. 1.408A-6, Q&A 8, is that we are required to reduce the basis in the Roth account by the amount of all distributions, whether or not the distributions are qualfied.
If we follow the Form 8606 and Publication 590, we must reduce the Roth basis by prior-year first-time homebuyer distributions, but not by current-year first-time homebuyer distributions. This makes no sense at all. Can anyone think of a reason for the Form 8606 yields a result that seems to conflict with the statute and the regs? | |
| 23 May 2008 | |
| I think all the form cares about is producing current year taxable income. Basis reduction for current year first time homebuyer will show up on next year's form. | |
| 23 May 2008 | |
| FINAL-REG, TRC-REGS, §1.408A-6. Distributions
Q-16. How is the basis of property distributed from a Roth IRA determined for purposes of a subsequent disposition? A-16. The basis of property distributed from a Roth IRA is its fair market value (FMV) on the date of distribution, whether or not the distribution is a qualified distribution. Thus, for example, if a distribution consists of a share of stock in XYZ Corp. with an FMV of $40.00 on the date of distribution, for purposes of determining gain or loss on the subsequent sale of the share of XYZ Corp. stock, it has a basis of $40.00. I think Q-16 only applies to distributions of property, such as stock, not cash. But I can't think of any other basis problems with Roth IRAs. Why would the basis be adjusted for first-time homebuyer distributions? | |
| 23 May 2008 | |
| I have a situation where the taxpayer has a Roth basis of $11,000, but he is planning on liquidating the entire $17,000 balance in the account in 2008 to buy his first home. Following the Form 8606, if he takes the entire amount in 2008, none of the $17,000 is taxable since the form does not reduce basis by the $10,000 first-time homebuyer distribution. However, if he takes $10,000 in 2008 and $7,000 in 2009, $6,000 of the $7,000 distribution will be taxable in 2009 since the form instructions say to reduce basis by first-time homebuyer distributions made in prior years.
I am not complaining -- it is an obvious error in the drafting of the forms, but the error is in the taxpayer's favor. | |
| 23 May 2008 | |
| I'm confused. Why does your client have a basis lower than the account balance? I can't find that topic anywhere in my research. Pub 590 doesn't address basis for Roths, only traditional IRAs as far as I could see. What am I missing? | |
| 23 May 2008 | |
| The reason that the client has an account balance that is higher than his basis is that he fired his stockbroker and took over managment of his account. In other words, his investments actually appreciated in value. | |
| 23 May 2008 | |
| Was this question answered, or do we put it down to a form error? I couldn't decypher Dennis' response. There was still 7K hypothetically in 09 (so there is money), 6k taxable, why are those same earnings tax free in 08?
Strange error in that it's almost like they went out of their way to make it; does the pub state don't reduce, or just the "form"? Agree on the stockbrokers. I do my own investing. Jerome Levy Institute at Bard College is my advisor, free and rarely wrong about macro-economics, but they do call it a little early at times. Of course, they are not pimps, err stock-pickers (of course, you can pimp the entire system, like Kudlow). lol. | |
Seaside CPA (talk|edits) said: | 23 May 2008 |
| The way I read the form you would show $17,000 on lines 19 & 21, $11,000 on Line 22, which would result in $6,000 being taxable, if he takes the full $17,000 in 2008. Which figures do we not agree on, that way we can maybe see what to look at.
Line 20 could be $10,000 if taxpayer had a qualified first time homebuyer distribution AND made a contribution to a Roth for 2002 or earlier. Is this the case? | |
Seaside CPA (talk|edits) said: | 23 May 2008 |
| Riley2, my above numbers are assuming the distributions are nonqualified. | |
| 23 May 2008 | |
| $17000 on line 19. $10,000 on line 20 $7,000 on line 21 $1,000 on line 22 is what is supposed to happen per code. Line 22 instructions do not specifically provide for reduction of basis for current year transaction. Reduction does, however, still exist.♫ | |
| 23 May 2008 | |
| I figured it out.
The Form 8606 includes an assumption that the first-time homebuyer distribution is the last distribution made during the taxable year. In other words, the nonqualifying distribution is made first, and would be nontaxable to the extent of basis. The first-time homebuyer distribution is made after the nonqualifying distribution, and would be nontaxable under the statute. This assumption seems to conflict with Internal Revenue Code § 408(d)(2) which provides that all distributions during the year are to be treated as one distribution; however, 408(d)(2) was originally written before Roth IRA’s were introduced into the code. | |
| 23 May 2008 | |
| Makes sense. All distributions (Line 19) less distributions exempted under statute (Line 20) = basis reduction subject to tax. | |
| 23 May 2008 | |
| On further thought, it doesn't make sense. If client doesn't take it all, there is negative basis the following year. Makes the form calculation interesting in the case of further withdrawal. | |
| 23 May 2008 | |
| I'm sorry I'm so dense (write it off to trip to the dentist today), but I still can't figure out why gain in his account would be taxable. I thought that all distributions from Roths are tax-free as long as they are qualified distributions & you are over 59½, regardless of the amount of growth in the plan.
When I looked at the first-time homebuyer chart in Pub 590, it referred to adjusting the basis in a traditional IRA in which the owner has basis. Help me out here. | |
| 24 May 2008 | |
| All qualified distributions from Roth accounts are nontaxable. Nonqualified distributions are nontaxable to the extent of basis. In this particular case, since the client is under the age of 59 1/2 and in good health, $7,000 of the proposed distribution will be nonqualified. The $10,000 first-time homebuyer distribution is qualified (even though he is under 59 1/2), and therefore nontaxable. | |
