 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 an 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 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 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