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1099-R and taxable income

Level 3

Have a retired client with a Traditional IRA and a SEP IRA. She has a basis in the SEP however the Traditional IRA was employer-funded and pre-tax so no basis.

Both 1099R forms have the IRA/SEP/SIMPLE box checked. The client withdrew $10k from Traditional IRA. My understanding is this should be fully taxable however the program insists on reducing the SEP IRA. Any insight?  If I uncheck the IRA/SEP/SIMPLE box the IRA becomes fully taxable.

Thanks.

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Level 11

I've heard of an IRA being funded by an employer . . . through paycheck deductions.  The taxpayer should have been claiming IRA contributions each year on their 1040 which would either result in a tax deduction or tax basis in the IRA (reported and accumulated on Form 8606 each year).  My first step would be to go try to unravel that mess.

However, I've never heard of a SEP-IRA with tax basis (but I've not actually seen a SAR-SEP, they went extinct before I got into this business, so maybe it has to do with that?)

For purposes of determining the amount of tax basis recovered tax-free when taking an IRA distribution, all of your IRAs are considered to be one big IRA.  This includes SEP-IRAs and SIMPLE-IRAs.  See Form 8606 and instructions.

Rick

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Level 11

I have never heard of an IRA being funded by an employer.

SEP-IRA: yes

SIMPLE-IRA: yes.

But neither of these are really IRAs.

** I'm still a champion... of the world! Even without The Lounge.
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Level 11

I've heard of an IRA being funded by an employer . . . through paycheck deductions.  The taxpayer should have been claiming IRA contributions each year on their 1040 which would either result in a tax deduction or tax basis in the IRA (reported and accumulated on Form 8606 each year).  My first step would be to go try to unravel that mess.

However, I've never heard of a SEP-IRA with tax basis (but I've not actually seen a SAR-SEP, they went extinct before I got into this business, so maybe it has to do with that?)

For purposes of determining the amount of tax basis recovered tax-free when taking an IRA distribution, all of your IRAs are considered to be one big IRA.  This includes SEP-IRAs and SIMPLE-IRAs.  See Form 8606 and instructions.

Rick

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Level 3

Looking at old W-2's, the IRA was apparently funded by earnings pre tax and maximized each year, not going over the allowable amount.

My understanding of BASIS is the money that has already been taxed. So if the IRA is from pre tax earnings, there is no basis? Am I misinterpreting this? 
Thanks!

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Level 11

There's no provision that I know of for an employer to fund an IRA with pre-tax wages.  IMO the wages should be reported on the W-2 as taxable income (and subject to SS/MC taxes) and the deduction taken on the 1040 as an IRA contribution (remember the good ol' days when we could just say "on line 32").

Look at the year-end paystub and see if the math supports your conclusion that this was pre-tax, I'm not sure a W-2 by itself is going to tell you anything.

This seems to be the week for discussions about clients making up their own tax laws.  There was one yesterday about a client who "wanted to" defer tax on his land sale for two years.  And another one later in the day that I can't remember the details to but the client "wanted" to do something that had no support from actual tax laws.

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Level 3

Don't have access to a year-end pay stub but the W2 supports this.

For the year 2017, box 1, wages, tips etc $192787. Box 5 medicare wages $216787 so a difference of $24k.  Box 12 shows E - (403b) contribution of 24k which balances to medicare wages.

So it appears the contributions are pre tax?  I think I have another clue... While employed, the client's 403B was managed by investment firm "A". Upon retirement client transferred the 403B to investment firm "B". No tax implication with the transfer.

It is firm B that is issuing the 1099-R and checking the box IRA/SEP/SIMPLE and that is triggering the basis issue. Does this sound logical?

 

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Level 11

Words matter.

A 403(b) is NOT an IRA.  It may, however, have been rolled over into an IRA when it moved from A to B and that's why it's now being reported as an IRA.  You're correct in that it likely has no tax basis since it came from a pre-tax employer retirement plan.

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