 Income tax 2022-2023. Ira distributions. Let's do some wealth preservation with some tax preparation. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. When looking at our income tax formula we're focused once again on line one that being income remembering that the first half of the income tax formula is in essence and income statement although a strange one where we have income minus the equivalent of expenses being deductions equals the equivalent of net income this being taxable income our objective being the opposite of a normal income statement that being to get as low a taxable income as possible. So with regards to the income line then the question is is it income if it's income do we have to include it in taxable income that's the general concept we're now focused in here on the IRA and whether or not we have income with relation to an IRA. Most of this information is going to come from the form 1040 instructions tax year 2022 line instructions you can find at the IRS website irs.gov irs.gov first page of the form 1040 we're focused here on line four and so let's get into the general concepts of this. Now when we think about an IRA we're thinking about a benefit that the tax code might provide trying to incentivize us to save for retirement so the general idea would be we as decision makers are quite good at the day-to-day decisions but we're not as good oftentimes with those long-term decisions possibly sacrificing in the current day for a bigger benefit at a later point in time in this case saving for retirement so the government tries to put incentives in place through the tax code to get us to do certain things such as save for retirement so different kinds of retirement plans then could be through the work which would be the 401ks the 403b's and so on and then if we don't have a retirement plan through work or if we're able to also invest in something that's not tied to our employment which is what we're focused generally on here we've got the IRA distributions so you can think about the general strategy as being somewhat similar between you know all of these kind of retirement type of strategies the iris basically trying to incentivize people to save for retirement by deferring the tax the tax implications of income now if you're investing in a 401k or a 403b because you get these benefits through work then you're going to put this money in possibly just out of your earnings on a weekly or monthly basis whenever you get paid and that distribution into the retirement plan will be reflected on the form w2 reducing box one and reporting it in box i think 12 to show to show that distribution therefore it's quite easy in those situations to report the w2 income that has been reduced for any contributions to a retirement plan but if you're having a retirement plan contributions that's in the form of an IRA not going through the employment then that's when you have this above the line deduction when you put the money into the IRA and so you get the tax benefit at that point in time which is more easily seen on the first page of the form 1040 now that's really just going to be a deferral of the taxes because you're basically lowering the income at the point in time you put the money in that means at retirement when you pull the money out or possibly before retirement then you're going to have to you're going to have to pay taxes at the minimum and because that's the cost right so now when you pull the money out you're going to have to pay the taxes and include that in income now if you don't wait till retirement age you will then generally also have to pay a penalty on it because the whole deferral process was based on the idea that you're basically locking your money away for retirement and if you if you don't do that if you pull it out early then you have to pay the taxes that you deferred which makes sense but also you get you get penalized on it that's the general notion all right keeping that in mind we're looking at the IRA's distributions this is when the money is coming out of an IRA account which is which is going to be the retirement type of account and also I just want to point out when you think about these kind of retirement type of accounts people often think of them as completely separate kind of things like an IRA or a 401k is different than investing in a mutual fund it's not really different because usually the investments that are are making up an IRA or a 401k or a 401 or a 403b or whatever are usually some form of mutual fund the only thing that's different about it is they're under the umbrella now of some kind of retirement account which has this implications with regards to the taxes so now we're thinking about these investments that are under the umbrella usually stocks and bonds of an IRA that are being distributed meaning we're taking the money out and now the financial institution is going to be reporting because that could be an income triggering event given the fact that we got the tax benefit when we put it in the form typically being used is the 1099 are so we should then receive a form 1099 are showing the total amount of any distribution from your IRA before income tax or other deductions were withheld the amount should be shown in box one of form 1099 are now note that if you're doing taxes for older individuals past retirement age you would expect to receive 1099 ours that would be a normal kind of process because that's when you would expect the retirements to be happening and those could be taxable events at that point in time and we'd have to do tax planning based on how much tax they would owe based on how much they're going to pull out of these kind of plans however you also might get like a 1099 are when someone's still in their working years and that's scary because that might mean that they pull the money out early not only triggering a taxable event but possibly substantial penalties so that's the thing to be careful about so unless otherwise noted in line for a and for b instructions an IRA includes a traditional IRA Roth IRA simplified employee pension SEP IRA and saving incentive match plan for employees a simple IRA so let's just break those down a little bit here so a normal IRA is kind of similar to like a 401k plan where you get the benefit of putting the money in and deferring it instead of reducing the money when you put it in in line one of the form 1040 it's going to be an above the line deduction because it wasn't pulled out of like your w2 wages instead it has to be the above the line deduction a Roth IRA is is a situation where now you don't get the tax benefit when you put the money in but you get the tax benefit basically when you take the money out why would they do that the government once again trying to incentivize you to put money and save it now what if you're in a situation where you don't have that much tax right now at this point in time because your income is fairly low or you think that the government is spending massive amounts of money and at the point of retirement the tax rates are going to have to go up at some point in time or something like that so I'd rather take the hit now than pay the tax later because something's going to hit the fan at some point you might think something like that well in that case then it wouldn't be an incentive to use the IRA because you're not paying much taxes or you think the taxes will be worse later when you're going to be hit with them so then you could put money in using a Roth IRA where you basically pay the taxes now but you get like the benefit of the earnings and when you take it out you don't have the you get the benefit at that point so it would be nice to have a little bit in both something like a Roth and a normal IRA so at the point of retirement we can live on income which is only part taxable right so if I got if I lived on 100,000 and half of it came from an IRA and half from a Roth IRA only the half the 50,000 from the taxable IRA would be subject to tax which means I could be living on 100,000 but only paying taxes on the 50,000 which would be a lower income threshold and that means in our progressive tax system we'd be paying a substantially less amount of tax right so that would be ideal if possible but again most people are putting money in from a 401k plan and so there's somewhat kind of limited tight to work and we'll talk about those possibly later then you got these simplified employee pension a SEP plan now this is going to be kind of like a 401k plan but it's going to be for smaller businesses because 401k plans are quite expensive to manage and if you're a sole proprietor you might set up a SEP type of plan for yourself to be able to put more money in than you otherwise would in like an IRA we might talk more about that when we get to schedule C's and a saving incentive match a simple same similar kind of concept that's kind of like a 401k for a small business trying to mirror some of the benefits they can be provided and possibly giving more ability to the owner to put money into something like an IRA to give tax benefit from it without the burdensome prospect of making a 401k which is quite burdensome so except as otherwise provided next leave line for a blank and enter the total distribution from form 1099 our box one online 4b so remember we're talking about the distribution side of it we're taking the money out now that have been put in to say an IRA so exception one enter the total distribution online for a if you rolled over roll over part or all of the distribution from one Roth Roth IRA to another Roth IRA or IRA other than a Roth IRA to a qualified plan another IRA other than a Roth IRA so this becomes important with any any money that you have under the umbrella of a retirement plan we're talking here about IRAs but similar kind of concepts if they're in like a 401k plan or something if if you want to roll that into some other investment like another IRA then because you want to switch financial institutions for example you want to go from one financial institution to another then you can't you got to be very careful careful in that process because if you if it's shown as you distributing the money and then reinvesting the money now you're going to get hit with the tax for pulling the money out and you're going to be hit with the with possibly penalties for pulling it out early so if you're going to try to move from one financial institution to the other it's usually pretty easy to do because you can talk to the financial institution that you want to do business with and they will usually quite quite happily try to help you out to to make it a rollover distribution and make sure it's properly recorded as a rollover and showing on the 1099 as a rollover so that so that you can tell the IRS look at yeah went from here to here but it's not a distribution it shouldn't be a triggering tax event and I shouldn't be penalized on it so also enter rollover next to line 4b so if the total distribution was rolled over enter zero online 4b so this also applies if you're talking to anybody that's switching jobs or something like that or they want to go to another financial institution or something like that you want to be able to tell them make sure that you are categorizing something as a rollover not as a distribution talk to the financial institutions make sure that you know they're they're working that out so so it's not going to be a distribution but a rollover so if the total distribution wasn't rolled over enter the part not rolled over online 4b unless exception exceptional outstanding to applies to the part not rolled over generally a rollover must be made within 60 days after the day you receive the distribution so there's this time limit usually these days it can be kind of a pretty much same day if you're doing a rollover from one institution to another otherwise you've got this kind of day limitation so you want to make sure that you within the threshold so for more details on rollovers you can see publication 590a and publication 590b so if you rolled over the distribution into a qualified plan and you made the rollover in 2023 include a statement explaining what you did so exception two if any of the following apply enter the total distributions online for 4a and c form 8606 and its instructions to figure the amount to enter online 1 if you received a distribution from an IRA other than a Roth IRA and you made non-deductible contributions to any of your trend traditional or sep IRAs for 2022 or an earlier year if you made non-deductible contributions to these iras for 2022 see publication 590a and publication 590b too you received a distribution from a Roth IRA but if either a or b below applies enter zero online for b you don't have to see form 8606 or its instructions a distribute distribution code t so notice these are going to be the codes in the form 1099 so now you've got a code t is shown in box 7 of form 1099 r and you made a contribution including conversion to a Roth IRA for 2016 or an earlier year b distribution code q is shown in box 7 of form 1099 r so when you look at those distribution codes those are going to be an indication of like the kind of distribution that is put in place and we can look at the instructions for the 1099 r to give us more detail of what those distribution codes are so if we have more exotic distribution code instead of just like a one or something like that or seven then then you could then we can you know research it from that point three you converted part or all of the traditional sep sep or simple ira to a Roth IRA in 2024 you had a 2021 or 2022 IRA contribution returned to you with the related earnings or less or less any loss by the due date including extensions of your tax return for that year five you made excess contributions to the IRA for an earlier year and have them returned to you in 2022 so we have some issues with regards to the limits of how much we can put into an IRA in the case that you over put into the IRA and then you got it returned so okay so six you re characterized part or all of the contribution to a Roth IRA as contribution to another type of IRA or vice versa so exception three if all or part of the distribution is a qualified charitable distribution a QCD enter the total distribution online for a so if the total amount distributed is a QCD enter zero online for B so if we had a distribution from from a retirement plan it's usually going to be you know a taxable it might be a taxable event for us so in some cases you might say well I'd maybe I if I if there's some way I can give that distribution as say a charitable contributions then possibly I can get a tax benefit in some way possibly by going directly to the charitable so it would be more of an unusual kind of situation but possible opportunities for tax planning if you have if you would like to you know look into that in more detail so if only part of the distribution is a QCD enter the part that is not a QCD online for B unless exception two applies to that part enter QCD next time or B a QCD qualified charitable distribution is a distribution made directly by a trustee of your IRA other than an ongoing step or simple IRA to an organization eligible to receive tax deductible contributions in essence a charity with certain exceptions you must have been at least 70 and a half when the distribution was made generally your total QCDs qualified charitable contributions for the year can't be more than $100,000 on a joint return your spouse can also have a QCD up to $100,000 the amount of the QCD is limited to the amount that would otherwise be included in your income so if your IRA includes non-deductible contributions the distribution is first considered to be paid out of otherwise taxable income C publication 590B for more details so if that applies to you you can do some more research there caution you can't claim a charitable contribution deduction for any QCD not included in your income which kind of makes sense right you're trying to do some tax planning saying there's going to be a taxable event what if I contribute this to the charity if you do that is it possible that I don't have to include the income that would otherwise be included as income in income if that's the case you already got a benefit by not including it in income and would be double dipping if you were able to not include it in income and get a charitable deduction for it right that would be a double dip exception for if all or part of the distribution is a health savings account an HSA funding distribution F H F D enter the total distribution online for a if the total amount distributed is an H F D and you elect to include it from income enter zero online for B if only part of the distribution is an H F D and you elect to include exclude that part from income enter the part that isn't an H F D online for B unless exception two applies to that part enter H F D next to line for B so another somewhat unusual transaction where you're going to have the distribution go directly here so an H F D is a distribution made directly by the trustee of your IRA other than an ongoing sep or simple IRA to your HSA so once again the idea being well there's going to be a distribution possibly a required distribution I'm going to have to pay taxes on it is there some way I can distribute it to say my my HSA health savings account and possibly have a tax benefit in that way so if eligible you can generally elect to exclude an H F D from your income once in your lifetime so once in your lifetime so you can't exclude more than the limit why couldn't I remember anything about limits and HSA contribution or more than the amount that would otherwise be included in your income so obviously the idea being you're going to get you're going to get a benefit of excluding it and you can't exclude an amount that would be more than the amount that you would you would have you know had to put in the income so if your IRA includes non-deductible contributions such as H F D is first considered to be paid out of the otherwise taxable income so for more details if you want to dive into that more detail publication 969 caution the amount of an H F D reduces the amount you can contribute to your HSA for the year so you got your contribution limits to an HSA which of course will be impacted which would be reasonable you would think if you have this kind of system that you're looking into for your tax benefit purposes so if you fail to maintain eligibility for an HSA for the 12 months following the month of the 8 H F D you may have to report the H F D as income and pay additional pay an additional tax you can see form 8 8 8 9 and instructions part 3 for that more than one exception applies what if you have more than one of these exceptions applying here that's going to really complicate things so if more than one exception applies include statements showing the amount of each exception instead of making an entry next to line 4 B for example line 4 B 1000 rollover and 500 H F D but you do not need to attach a statement if only exception two and one other exception applied more than one distribution if you or your spouse is filing jointly received more than one distribution figure the taxable amount of each distribution and enter the total of the taxable amounts online for B enter total amount of those distributions online for a caution you may have to pay an additional tax if you received an early distribution from your IRA so that's the standard thing we want to basically keep in mind the the point of putting money into a retirement plan is that the iris is giving us a tax benefit a deferral typically for putting the money away if we try to take the money out early even though it's our money then that we're going to get hit with a penalty because we we took the agreement of getting the tax deferral benefit and locking the money away that's kind of like the whole that's the bargain basically so and the total wasn't rolled over so see the instructions for schedule 2 line 8 for details more information for more information about iris you can see publication 590 a and publication 590 b on the iris website iris.gov