Tag Archives: retirement planning

Health Savings Accounts, Self-Directed 401(k), Self-Directed IRA & Qualified Plan Information, Self-Directed Roth IRA, Self-Directed Traditional IRAs

UBIT? You Bet!

April 16, 2015 Quincy Long

Questions:

I think the answer to my question. Does Arkansas charge tax on UBIT and UDFI?

in the book 2009 Multistate Guide to Regulation and Taxation of Nonprofits By Steven D. Simpson. Which is found in full online through google books at:

https://books.google.com/books?id=KE5dVpNcWkwC&pg=SA3-PA9&lpg=SA3-PA9&dq=Section+512+of+the+Internal+Revenue+Code+arkansas&source=bl&ots=YFNc-ZE7U0&sig=PpYxNwFJEhq5fd920ha18OXLFkw&hl=en&sa=X&ei=ItEKVdmUOcSwggSMiIOoBQ&ved=0CC8Q6AEwAw#v=onepage&q=Section%20512%20of%20the%20Internal%20Revenue%20Code%20arkansas&f=false

It says that Arkansas does not have IRS code sections 501-529, but that it does tax unrelated business income on income attributable to Arkansas. Since UDFI is Section 514 I assume that there is no state income tax on UDFI. I also believe that attributable to Arkansas means the source of the income is physically inside the state.

This book seems to be a source of answers on UDFI and UBIT for all 50 states or at least a starting place.

I still have the following 3 questions from yesterday in a more simplified form:

1) If you pay UDFI on the sale of a depreciated rental property do you also recapture depreciation at a 25% rate?

2) If my IRA purchases a condo for nightly rental using debt will it owe UBIT on the nightly rental and UDFI on the profit percentage of the debt?

3) In the following published article you state that UDFI is on Acquisition debt. Does this infer that if I pay cash for the house and then borrow against it later there is no UDFI? In other words is UDFI on all debt or just aquisition debt.

https://www.questira.com/why-your-ira-may-owe-taxes-to-pay-or-not-to-pay-that-is-the-question/

Definition of “Debt Financed Property.” In general, the term “debt-financed property” means any property held to produce income (including gain from its

disposition) for which there is an acquisition indebtedness at any time during the taxable year (or during the 12-month period before the date of the property’s disposal if it was disposed of during the tax year). If your retirement plan invests in a non-taxable entity and that entity owns debt financed property, the income from that property is attributed to the retirement plan, whether or not the income is distributed.

Answer:

Thanks for the reference and the questions yesterday. Sorry we couldn’t get to all of them on the call. As far as your questions:

1) I believe the IRA would owe this tax, but I have heard different arguments on this. If you think about it, it wouldn’t make sense to be able to deduct depreciation from current UDFI and then escape it on the sale of the property. However, one CPA told me that if the property had been paid off for more than 12 months so there was no capital gains tax then there wouldn’t be depreciation recapture either. I think this was based on the theory that ‘depreciation recapture’ is really another form of capital gains, technically called ‘unrecaptured section 1250 gains.’ To be honest, I just don’t know.

2) That’s a good question. Certainly running a hotel is considered to be a business operation as opposed to just rental income, so I see where you could assume that the nightly rentals would be UBI and not UDFI. I think that if it is considered to be a business operation then probably all income from that business would be UBI not UDFI. I don’t think you can split the capital gains in that case away and call them UDFI, but once again I’m really not that confident, especially this early in the morning. On the other hand, if it were me I would probably just report it as UDFI and see if the IRS disagreed. There is a lot of ambiguity in this area, unfortunately.

3) Another good question, but this one I can actually help you with. 🙂 Acquisition indebtedness is 1) when acquring or improving the property; 2) before acquring or improving the property if the debt would not have been incurred except for the acquisition or improvement; or 3) after acquiring or improving the property if (a) the debt would not have been incurred except for the acquisition or improvement, and b) incurring the debt was reasonably forseeable when the property was acquired or improved. So most likely in your scenario the debt would still be considered ‘acquisition indebtedness.’

Here is an interesting brain twister: what if my IRA owns a piece of land with no debt which produces no income but which is expected to be sold within a year. If my IRA borrows money to purchase bank stock, which will not be sold for several years, which property is considered debt-financed, the land or the bank stock? If the answer is the bank stock, then can my IRA escape taxation entirely on the gains from the bank stock because the debt will have been paid off from the sales proceeds of the land for more than 12 months prior to the sale of the bank stock?

Coverdell Education Savings Account, Health Savings Accounts, Self-Directed Roth IRA

Coverdell ESA & Partnering Accounts

April 6, 2015 Quincy Long

You asked:

“Quincy: RE: A Coverdell ESA, if an individual has contributeed to a Coverdel on behalf of his child for the last 3 years, $2,000 each yerar for a total of $6,000, can he withdraw the $6000 in contributions, leaving the accumlated gains? If so are there any tax related consequences?

2nd question: can my ROTH and HSA partner to buy or option a note and share in the profits. Or can say the ROTH buy option and sell to the other IRA to derive a profit.”

My answer:

Regarding the Coverdell ESA distribution, go to IRS Publication 970, entitled “Tax Benefits for Education,” which you can download for free from www.irs.gov. The description of how to calculate the taxability of distributions is on page 53. Essentially, the distribution is done on a pro rata basis. In other words, normally each distribution will contain part of your after-tax contributions and part of any gains made in the account. Unlike the Roth IRA, your basis is not distributed first. In addition to taxes, a 10% penalty would be owed for any portion of the distribution which is taxable because it exceeded the Adjusted Qualified Education Expenses (AQEE). To the extent there was sufficient AQEE, there is no tax and no penalty on the distribution.

As to your second question, partnering your Roth IRA and your HSA is the same as partnering two IRAs – they are disqualified persons to each other, so you cannot invest in any way where one benefits disproportionately. Arguably they could partner with each other on equal terms, although you will want to be cautious in how you handle the investment if you go that route. The most conservative answer is to not partner disqualified persons together at all. However, many people choose to partner accounts together, even if they are disqualified persons too each other.

I hope that helps. Thank you for the question, and have a great day!

Self-Directed IRA & Qualified Plan Information

Seller Financed Real Estate

March 18, 2015 Quincy Long

You asked:

“Hey Quincy – wife and I met you on IRA Fun Cruise in January. This is a rookie question. Sceanario: we buy an investment property through one of our Roth self directed IRAs. We plan on putting 20K down and getting seller financing for the balance of purchase price. The property is tenant occupied with a Property Manager in place. The property is currently in a land trust and I believe seller wants to use a land contract of sale to sell to our IRA. #1, is that type fo sale to us considered “non-recourse”? #2, from the purchaser perspective, what is your opinion on buying property through a land contract of sale? Thanks so much.”

My answer:

That is a great question. Whether the debt instrument is a land contract or a deed of trust or a mortgage, it has to be made clear that the only thing the lender can do is take the property back from your IRA. There would need to be language in the land contract (generally just a short paragraph) making this clear. As to your second question, in some states that is a very common way to sell property, while in other states such as Texas it is fairly rare. You would need to get some local advice on that issue, unfortunately.

The only other thing that comes to mind is that this may cause your IRA to owe Unrelated Business Income Tax (UBIT) on the profits from this property. I just finished recording a webinar on this topic with Matt Allen of North American Savings Bank (www.iralending.com) which should be up on the website soon. Also, we have a more extensive webinar that we have recorded on this subject which you can find on our website, as well as written materials. I wasn’t sure how well versed you were with the rules for debt-financed property within an IRA.

Let me know if you have any other questions. Have a great day!

Coverdell Education Savings Account, Health Savings Accounts, Self-Directed 401(k), Self-Directed IRA & Qualified Plan Information, Self-Directed Roth IRA, Self-Directed Traditional IRAs

U. S. Supreme Court Rules that Inherited IRAs Are Not Protected In Bankruptcy

June 16, 2014 Quincy Long

On June 12, 2014, the United States Supreme Court ruled in a unanimous opinion that inherited Roth and traditional IRAs are not protected from creditors under the “retirement funds” exemption in the U.S. Bankruptcy Code. The case is Clark v. Rameker, Trustee, 573 U.S. ____ (2014).

In 2001, Heidi Heffron-Clark inherited a traditional IRA worth approximately $450,000 from her mother, Ruth Heffron. Ms. Heffron-Clark elected to take monthly distributions from the account. In 2010, Ms. Heffron-Clark and her husband Brandon Clark filed Chapter 7 bankruptcy and identified the inherited IRA, then worth approximately $300,000, as exempt under Bankruptcy Code Section 522(b)(3)(C). The bankruptcy trustee and unsecured creditors objected to the exemption on the ground that funds in an inherited IRA were not “retirement funds” within the meaning of the statute. The Bankruptcy Court agreed, and disallowed the exemption. The Clarks appealed to the District Court, which reversed the decision of the Bankruptcy Court. Undeterred, the bankruptcy trustee Rameker appealed to the 7^th Circuit Court of Appeals, which reversed the District Court and ruled that the inherited IRA was not exempt. The 7^th Circuit Court expressly disagreed with the 5^th Circuit’s ruling in In Re Chilton, 674 F.3d 486 (2012), which ruled in favor of the debtor’s exemption of an inherited IRA. The U.S. Supreme Court decided to hear the case to resolve the conflict between the Circuit Courts.

When an individual debtor files bankruptcy, his assets become part of the bankruptcy estate. However, the Bankruptcy Code allows debtors to exempt from the bankruptcy estate some limited property. The exemption in this case allows debtors to protect “retirement funds to the extent those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code” (see Sections 522(b)(3)(C) for state exemptions and 522(d)(12) for federal exemptions) . Traditional IRAs are created under Internal Revenue Code (IRC) Section 408, and Roth IRAs are created under IRC 408A.

The Supreme Court ruled that the ordinary meaning of “retirement funds” is properly understood to be sums of money set aside for the day an individual stops working. According to Justice Sotomayor, who wrote the unanimous opinion for the Court, there are three legal characteristics of inherited IRAs which provide objective evidence that they do not contain such funds: 1) the holder of an inherited IRA may never contribute additional money to the account; 2) holders of inherited IRAs are required to withdraw money from the accounts, no matter how far they are from retirement; and 3) the holder of an inherited IRA may withdraw the entire balance of the account at any time, and use the money for any purpose, without penalty. This interpretation is said to be consistent with the purpose of the Bankruptcy Code’s exemption provisions, which effectuate a careful balance between the creditor’s interest in recovering assets and the debtor’s interest in protecting essential needs. Nothing about an inherited IRA’s characteristics prevent or discourage an individual from using the entire balance immediately after bankruptcy for purposes of current consumption. The court was not persuaded by the Clarks’ claim that funds in an inherited IRA are retirement funds because, at some point, they were set aside for that purpose.

So what are the implications of this ruling for those who inherit traditional or Roth IRAs? If the inheritor of an IRA is a spouse who is under age 59 ½, they would normally want to leave the IRA as a beneficiary (inherited) IRA rather than roll the IRA into their own account. As long as the funds are being distributed from an inherited IRA there is no 10% premature distribution penalty, and the spouse would not be required to withdraw money from the IRA until their deceased spouse would have reached age 70 ½. This gives the surviving spouse access to money in the inherited IRA which they may need. However, now an inherited IRA will not be protected in bankruptcy in most cases, so a spouse who is in financial difficulty may decide to roll the inherited IRA into their own IRA where at least it will have creditor protection.

If a non-spouse beneficiary inherits an IRA, it cannot be rolled into their own IRA and must either be distributed entirely by the end of the 5^th year following the year of death or over the inheritor’s expected lifetime. If the IRA is inherited directly by the non-spouse beneficiary, there will be no way in many cases to protect that IRA in bankruptcy. One solution that some planners have proposed is the leave the IRA to a properly drafted spendthrift trust rather than to the beneficiary directly. Having the IRA inherited by a properly drawn spendthrift trust can prevent the IRA funds from going to the beneficiary’s creditors. This ruling may be a boon to estate planning attorneys.

The news is not all bad, however. Some states, such as Texas and Florida, specifically protect inherited IRAs from creditors. Debtors who live in these states will have their inherited IRAs protected from creditors outside of the bankruptcy context and even in bankruptcy (assuming they meet the residency requirements) if they choose to use the state exemptions instead of the federal exemptions. However, a person with a large IRA should not automatically assume that the IRA would be protected even if they and their children live in a state with creditor protection for inherited IRAs. The state exemptions apply to the residence of the debtors, not to the residence of the deceased person, and people move around a lot. Life happens. Where your beneficiaries live now may not be where they live after inheriting your IRA. Unexpected events occur, and you must plan for them.

One thing is certain – estate planning for those with beneficiaries who are struggling with financial issues has become even more important. Also, bankruptcy planning for anyone who has a large inherited IRA just got more complex.

For a more complete analysis of the Clark v. Rameker case see the blog post of Texas bankruptcy attorney Steve Sather at http://stevesathersbankruptcynews.blogspot.com/2014/06/supreme-court-denies-exemption-for.html. You may read the Supreme Court’s opinion at http://www.supremecourt.gov/opinions/13pdf/13-299_mjn0.pdf.

Nothing in this article is intended as tax, legal or investment advice. If you need assistance with estate or bankruptcy planning, you should consult with a competent professional who practices law in these areas.

Self-Directed IRA & Qualified Plan Information

Using IRA to invest in Laundromat Business?

April 7, 2014 Quincy Long

Question:

I appreciate if you can answer my two questions below:

1- Can I use my IRA and invest in a Laundromat business as my down payment and borrow rest from SBA?

2- Can I buy a 2nd home with my SDIRA?

Answer:

1) Not directly in the IRA, no. Your IRA is to be invested for your future, not for your current benefit (or to benefit any other disqualified person). Some people say that you can set up a ROBS arrangement (Rollovers for Business Startup). This works like this: a) you set up a C corporation; b) you appoint yourself the sole director and officer; c) you have the corporation adopt a 401(k) plan; d) you roll your IRA into the 401(k) plan; e) you, as trustee of the 401(k) plan, purchase all of the shares of the C corporation; and (f) you hire yourself to run the corporation. If this sounds a bit complicated to set up and a little expensive, that’s because it is. The IRS has issued some guidance on concerns it has with ROBS arrangements, so if you go down that path you will need to work with someone who is very knowledgeable about this area and can satisfactorily address the IRS’ concerns. Investing your retirement money into what is essentially a start up business certainly can be risky. I would encourage you to do some research on ROBS arrangements and do some soul searching before setting this up. Many companies offer to set up ROBS arrangements. One such firm in Houston is DRDA, Inc., www.borsaplan.com. I am not qualified to make a judgment as to the validity of the structure, so that is something you must decide for yourself. Good luck!

2) Self-directed IRAs do buy real estate all the time. However, if you are asking can you buy a second home which you intend to use periodically personally then the answer is no, for the same reason the first answer is no. You cannot either directly or indirectly gain a personal benefit from your IRA’s assets, other than in the form of a distribution from the IRA.

Good luck with your investments, and let me know if you have any further questions.

Have a great day!

Self-Directed Traditional IRAs

Year End Retirement Planning

November 19, 2013 Quincy Long

As we approach the end of 2013 and begin thinking about 2014, it is time to reflect on our retirement planning and take some action steps to have a better tax result now and a more secure retirement later. Some of the issues you should consider include:

1) If you have traditional IRAs or other pre-tax accounts and are at least age 70 1/2, do not forget to take your Required Minimum Distribution (RMD). It is best not to wait until the last few days of the year, because this is an extremely busy time period for custodians and if there is any problem with your paperwork you may miss your deadline. The penalty for failing to take an RMD is 50% of what you should have taken, so this is something you want to avoid. Even if you have illiquid assets such as real estate in your account you still must take your RMD if you are subject to this requirement. It is possible to take a distribution of assets other than cash from your IRA to satisfy your RMD, but this does require an updated valuation of the asset, proper paperwork, and generally more time to process than just taking a distribution of cash. If you inherit an IRA, you generally must take an RMD each year regardless of your age or the type of account (including from a Roth IRA), beginning in the year following the date of death of the original account owner, unless you distribute the entire account within 5 years. Fortunately there is never a penalty for death distributions. Be sure and check with your tax professional or custodian for the amount of your RMD and any other information you may need well before the end of the year.

2) Consider your options for your business income retirement account. For your self-employment income, you generally have three choices of retirement accounts. The easiest one to set up and maintain is the SEP IRA, where you can put up to 25% of any wages you pay yourself if you have a corporation or up to 20% of your net earnings from self-employment, up to a maximum of $51,000 for 2013. Fortunately, you may both form and fund a SEP IRA until the tax filing deadline of the employer, including extensions. The second choice you have is a SIMPLE IRA, assuming you have less than 100 employees. You can defer wages of up to $12,000 for 2013 plus an additional $2,500 if you are age 50 or older by the end of 2013. Additionally, the employer will fund 3% of your wages or earnings into the account. Unfortunately, for 2013 you needed to establish the SIMPLE plan by October 1st, but you can begin planning for 2014 if this is your choice of plans. Finally, you can choose to have your own 401(k) plan for your business income. Salary or earnings deferral can be as much as $17,500 for 2013, plus an additional $5,500 if you reach age 50 by the end of the year for a total deferral of up to $23,000. The employer then can add a profit sharing contribution of up to 25% of wages or up to 20% of net earnings from self-employment into the plan, for a total contribution of up to $51,000 for 2013 or $56,500 for participants who are age 50 or older. Best of all, the salary deferral can either be deducted if deferred into a traditional 401(k) or can be deposited after-tax into a Roth 401(k), regardless of income level. A 401(k) plan for your business or self-employment income must be set up by December 31. Remember that with each of these plans you must cover eligible employees, so it is especially important to consult with your tax professional when deciding which type of plan is right for your business.

3) Consider doing a Roth conversion by the end of the year. Especially if you are having a lower income year, converting to a Roth IRA may be a great strategy. Anyone, regardless of age or income level, qualifies to convert a pre-tax account such as a traditional IRA, a SEP IRA, a SIMPLE IRA (provided you have participated for at least two years), or a former employer’s qualified plan into a Roth IRA. The amount of your conversion is added to your taxable income for the year, and to count for 2013 the conversion must be done by December 31. There are many considerations for deciding whether or not a Roth conversion is right for your personal situation, so a consultation with your tax advisor is very wise. One of the key considerations is what you are going to invest in with the Roth IRA after you do the conversion. If you have a great real estate deal, for example, a Roth conversion can be the right answer regardless of your age or income level. Generally you are better off doing a Roth conversion as early as possible during the year. If you decide by your extended tax filing deadline that you cannot afford the taxes or the investment does not do as well as you had hoped, you can always recharacterize the conversion back to a traditional IRA along with the net income attributable to the conversion amount, and there will be no negative tax consequences at all.

4) Consider using your year-end bonus to fund the balance of 2013 contributions and/or to fund 2014 contributions early. Although you do have until April 15, 2014 to fund your Roth or traditional IRA for 2013, the earlier contributions are made, the more money you can make in the accounts tax free. You can contribute up to $5,500 into a traditional or Roth IRA for 2013, or $6,500 if you are age 50 or older by the end of the year. No holiday season gift can ever match the joy of a more secure financial future for yourself and your children. Pay your retirement contributions first, and then use the balance of your money for less important purchases. If you contribute money into a Roth IRA, you can always withdraw your contributions (but not your profits) at any time at any age for any reason without any penalty, so it is a safe way to save money. You are not likely to miss it once it is in your Roth IRA, and it is generally protected from creditors as well.

5) Get a High Deductible Health Plan (HDHP) in place by December 1 to fund your HSA for 2013. In order to qualify for a Health Savings Account, you must have a HDHP in place by December 1 to qualify for a contribution. The contribution can be made up to April 15, 2014 for 2013. If you have individual coverage, you can contribute up to $3,250 for 2013, and if you have family coverage you can contribute up to $6,450 for 2013. If you are age 55 or older by the end of 2013 you can add $1,000 to the contribution limit. An HSA is great because it is the only account in which you get to both deduct your contributions regardless of your income level and pay no taxes on distributions for qualified medical expenses.

6) Give the gift of education as a holiday season gift. A Coverdell Education Savings Account (ESA) is used to save for qualified education expenses from kindergarten through college. Although you get no tax deduction for making a contribution of up to $2,000 per child per year, the account grows tax free, and distributions to pay for qualified education expenses are tax free. Even if the beneficiary of the ESA ends up not going to college, the account can be used for tutoring or other expenses through high school and can be switched over to a related family member if the original beneficiary does not use all of the money by age 30. Toys and Teddy bears give a limited amount of joy for a short period of time, but the gift of education will change your children or grandchildren’s entire lives for the better.

It is not possible to cover all of the details of each type of account in a short article, but hopefully this gives you some things to discuss with your tax advisor before the end of the year. For tax advice you should always contact your CPA or other tax advisor, because he or she will have a more complete picture of your financial situation.

Take advantage of the many FREE educational materials provided by Quest IRA, Inc. on our website at www.QuestIRA.com, and plan on attending as many of the live events as possible to network with other self-directed IRA clients. Our events schedule may be found at www.questira.com/events/. You can also call our offices toll-free at 800-320-5950 or 855-FUN-IRAS (855-386-4727) and ask to speak to one of our highly trained IRA Specialists. Happy holidays!

H. Quincy Long is a Certified IRA Services Professional (CISP) and an attorney. He is also President of Quest IRA, Inc. (www.QuestIRA.com), a self-directed IRA third party administrator with offices in Houston, Dallas, and Austin, Texas, and in Mason, Michigan. He may be reached by email at Quincy@QuestIRA.com. Nothing in this article is intended as tax, legal or investment advice.

Coverdell Education Savings Account, Health Savings Accounts, Self-Directed 401(k), Self-Directed IRA & Qualified Plan Information, Self-Directed Roth IRA, Self-Directed Traditional IRAs, Uncategorized

Can my IRA lend to a non disqualified person to purchase a home for my daughter?

August 11, 2013 Quincy Long

Question:

I understand my self directed Ira cannot lend to my daughter. But what if my Realtor borrows money from my IRA to buy a house and then sells that house to my daughter on a wrap,and some time later decided that he wants to sell out his equity in the wrap, could my IRA buy that note?

Answer:

Thank you for your question. The answer is no, your IRA cannot buy the note. There can be no direct or indirect benefit to a disqualified person (which your daughter is). Loaning money to your Realtor with the intention that the Realtor sell the house to your daughter on a wrap is only attempting to do indirectly what you cannot do directly, which is to benefit your daughter by facilitating her purchase of a house through the lending of money from your IRA. This is likely to violate more than one of the prohibited transaction rules.

For your reference, see Internal Revenue Code Section 4975(c)(1)(B), which prohibits the direct or indirect lending of money or other extension of credit between a plan (including an IRA) and a disqualified person. Also, you may be interested in Advisory Opinion Letter 2011-04A (Warfield), where the applicants asked if they could purchase a loan with their IRA that they owed to a third party bank who had loaned them money several years earlier. The Department of Labor ruled that the entire loan transaction needed to be reviewed from beginning to the end for prohibited transactions. Even though the loan was obviously not a prohibited transaction when originated, the purchase of the loan from the bank and the subsequent payments to the IRA would be prohibited transactions. Finally, to quote the Tax Court in the recent case of Fleck and Peek v. Commissioner, “Section 4975(c)(1)(B) prohibits “any direct or indirect * * * extension of credit between a plan and a disqualified person”. (Emphasis added.) The Supreme Court has observed that when Congress used the phrase “any direct or indirect” in section 4975(c)(1), it thereby employed “broad language” and showed an obvious intention to “prohibit[] something more” than would be reached without it. Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152, 159-160 (1993).”

I know that’s not what you wanted to hear, but it’s better to ask questions now than to destroy your IRA and possibly owe taxes and penalties. Have a great day!

Can I deduct my IRAs loss on my personal taxes?

May 16, 2013 Quincy Long

Your question was:

“I had $104,000. that I rolled in to an account with an IRA custodian – it was invested in a “bad” company called “****” my account shows the money as a loss on statement. As well I purchased two out of state properties that appear on my IRA account- both were sold … but no one ever paid for them- can any of this be written off in taxes, even though it is a “traditional IRA ”

The answer:

You can only deduct losses in a traditional IRA to the extent that you close all of your traditional IRAs and the total received as a distribution is less than the total undistributed after-tax contributions. For example, if you contributed $5,000 in non-deductible contributions and then built it up to $100,000, then you lost it all in a bad investment, all you could deduct when all of your traditional IRAs were closed would be the $5,000 after-tax basis in your account. Your deduction would be reported as a miscellaneous deduction subject to the 2% of adjusted gross income floor, which means that all of your miscellaneous deductions together must exceed 2% of your adjusted gross income before any of it becomes deductible on your Schedule A. This may limit further your ability to deduct your losses.

If all of the money in the IRA was pre-tax money (in other words, you deducted the contributions when you made them or were not taxed on the money contributed from an employer, assuming the money came from a former employer plan that was rolled into the traditional IRA), then you would be able to deduct none of your losses at all. The reason for this is that none of the money in the account was ever taxed in the first place, so therefore you cannot deduct the losses, since to do so would represent a double deduction, once when contributed and again when the money was lost. The following explanation is found on page 42 of IRS Publication 590, which you can download from www.irs.gov:

Recognizing Losses on Traditional Reporting and Withholding

IRA Investments Requirements for Taxable Amounts

If you have a loss on your traditional IRA investment, you can recognize (include) the loss on your income tax return, but only when all the amounts in all your traditional IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis, if any. Your basis is the total amount of the nondeductible contributions in your traditional IRAs. You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040). Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax.

Example. Bill King has made nondeductible contributions to a traditional IRA totaling $2,000, giving him a basis at the end of 2010 of $2,000. By the end of 2011, his IRA earns $400 in interest income. In that year, Bill receives a distribution of $600 ($500 basis + $100 interest), reducing the value of his IRA to $1,800 ($2,000 + $400 – $600) at year’s end. Bill figures the taxable part of the distribution and his remaining basis on Form 8606 (illustrated).

In 2012, Bill’s IRA has a loss of $500. At the end of that year, Bill’s IRA balance is $1,300 ($1,800 – $500). Bill’s remaining basis in his IRA is $1,500 ($2,000 – $500). Bill receives the $1,300 balance remaining in the IRA. He can claim a loss for 2012 of $200 (the $1,500 basis minus the $1,300 distribution of the IRA balance).

The rules for deducting losses in a Roth IRA are similar, except all money contributed to a Roth IRA is, by definition, after-tax money, so the deduction for a Roth IRA loss would be equal to the undistributed contributions to the account, subject to the 2% of adjusted gross income floor as discussed above.

If this seems a bit complicated, unfortunately it is. It is best to get the advice of a competent CPA to help you with this so that it is done right considering your personal tax situation. I am unable to give you tax or legal advice, but hopefully I was able to point you in the right direction.

I’m sorry for your loss and I wish you the best of luck in your future investments.

H. Quincy Long – President

The Balancing Act

January 7, 2013 Quincy Long

I traveled to Pompano Beach, FL last week to record a financial segment for “The Balancing Act”, a Lifetime Television show. A lot of hard work went into this and it went off without a hitch! It was such an honor for me to be on their show, the topic was my personal favorite (and area of expertise), Self-Directed IRAs. I finally got to wear my awesome suit that I have been tweeting about but I wasn’t ready for my lesson on wearing make up and eating spicy food- ha ha!!

See below for the pics And click HERE for the Press Release!

The recording will air on February 19th- Make sure you record your DVRs to watch me appear on National Television!!

The IRA Web Advisor