Today TaxMama® hears from Laura in the TaxQuips Forum, with a tough question. “In 2011 my Elderly client (78) pulled all the money out of a retirement account which his wife had set up for him some years back. My client learned about the account upon her passing and withdrew all the funds not knowing there would be tax implications.
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The 1099R has the box checked (TAXABLE AMOUNT NOT DETERMINED with a DISTRIBUTION CODE 7). I am trying to figure out the client’s basis. The contact at the bank has no idea what I am talking about. What should I do? Is there anything I can do to reduce my client’s taxable income?”
Dear Laura,
What is the source of this 1099R? Is it company retirement account, an IRA or an annuity?
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With an annuity, the company should know the original cost paid for the annuity.
That would be the basis.
With a company retirement account, his former employer might know if there was any after-tax money contributed.
The IRA, on the other hand? First see if their tax return contains a Form 8606 – NonDeductible IRAs. That form is designed to track the basis.
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Not everyone includes it in the return – especially for older IRAs.
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You would need to dig out prior year tax returns as far back as you can go to determine if there were any non-deductible contributions. On the other hand, you can ask him if he was aware of any.
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Most likely there were no such contributions made, so the whole thing is taxable.
Mike Reed, EA adds, if your client does not have past returns, possibly you can get a transcript.
And remember, you can find answers to all kinds of questions about retirement accounts and other tax and business issues, free. Where? Where else? At www.TaxMama.com.
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Not everything issued on a 1099-R is “retirement income” in the truest tax sense. It may be a self-funded annuity (which has basis) or redemption of some forms of life insurance (also with basis). And how often we forget to track basis in funds that are truly “retirement ‘ accounts”. You know the ones where you initially rolled-over $160K but in the end only got $140K in the final distribution because of market down-turns.
Dianne S. Martin, EA, ATA, ATP