 Income tax 2021-2022, IRA distribution. Get ready to get refunds to the max. Dive in into income tax 2021-2022. Here we are in the income tax formula. Still focused on line one, the income line. It's still looking deceptively simple with just one line. But remember, this is the summary formula. Many different things could feed into it. If you're thinking about this it's basically the summary of the 1040. Many other schedules can flow into each of the lines. The income line, in other words, could be supported for us with schedules such as schedule one, schedule C, schedule D, schedule E, and so on. This is the first page of the 1040. We're focused here on for A, IRA distributions, for B, and that's gonna be the taxable amount of the IRA distributions. When you're thinking about the IRAs we've got two sides that are gonna have tax implications. We've got us putting money into the individual retirement accounts or arrangements which is gonna be a tax benefit. We do that basically, we could think about through our working career, for example. And then we've got the distributions which typically we're thinking at retirement time. So if you're talking about younger people you're usually gonna be thinking about people putting money into some kind of retirement plan, possibly an IRA, and there could be overlaps between different types of plans like an IRA 401K, 403B, and where you can maximize your contributions into them. And then when you're talking about older people you're often thinking about the money coming out of these types of plans. And we're focused here on IRA types of plans but you have a similar kind of situation as the money comes out, as to whether it's gonna be taxable at that point in time. The general concept being with regards to these retirement accounts is that you get a tax benefit upfront, generally. And that's why you put money into the retirement account. And I wanna stress that here because note when we talk about these different kinds of retirement accounts these are often a huge tax benefit. And they're often tax benefits when we get into basically of like a 401K plan, for example and those kind of benefits that are something that the employer can offer as a benefit plan that could be quite significant although you do need income, you need cash in order to be able to put the money in in order to take advantage of it. However, you do not need to put money say into some kind of umbrella plan, some plan that's under the umbrella of an IRA or a 401K plan or something like that simply to save for retirement because the types of investments that you're putting the money into when you're talking about an IRA or a 401K plan is basically the same kind of investments that you can put outside the umbrella of an IRA or some type of 401K plan. In other words, it's usually stocks, bonds, mutual funds and so on and so forth. The reason you put it into this more restrictive category under like an IRA or a 401K plan or something like that is because you get the tax benefit. It's not like you have a different kind of investment that you only have access to that is a retirement type of investment. No, you're putting your money into a more restrictive thing which you wouldn't do unless you got a tax benefit. So in other words, you're putting money into the same kind of investments but you're locking it away and you can't touch it unless you're gonna get penalized and that's not a good thing. You don't want that. The only reason that you're gonna do that is because the government's given you an incentive to put it in a more restrictive area. If they didn't give you a tax incentive, you would simply put it into a retirement the same kind of investments possibly but you wouldn't have the same kind of restrictions as to being able to pull them out. You would be imposing your own restrictions on yourself in terms of how you're gonna save and what kind of saving decisions you're gonna be making. So we have the IRA distributions. You should receive a form 1099R so that's gonna be the distribution type of form. So once again, you get a 1099 form, often the type of form that you're gonna be receiving that will indicate that possibly you need to add something in income 1099R in this case showing the total amount of any distribution from your IRA before income tax or other deductions were withheld. This box should be shown in box one of form 1099R unless otherwise noted in the line for A and for B instructions and IRA includes a traditional IRA, Roth IRA, simplified employee pension, SEP IRA and a saving incentive match plan for employees, the simple IRA. So it gets a little bit confusing in terms of these different kinds of IRAs and different kinds of investment plans or retirement plans you could put money into on both sides of it, it gets confusing in terms of how much money you can put into these plans and then on the distribution side but usually on a traditional IRA which is similar to some other investment or retirement plans like a 401K, you get the benefit kind of on the front end when you put the money in and then when you take the money out at the distribution side at retirement that's when you have to basically pay the taxes. So it's more of a deferral that took place in that you're not paying taxes when you put the money in and the growth happening and then when you take the money out, you pay taxes meaning you got this huge deferral which could be quite beneficial although can lead to problems especially problems when you may not be used to handling those kind of tax situations at the point in time of retirement because you're probably used to or many people might be used to having their withholdings automatically kind of calculated as they're working for an employer and then in retirement when they pull the money out it's not gonna be tax-free they gotta figure out their taxes at that point in time which could be a little bit confusing except as provided next, leave line 4A blank and enter the total distribution from form 1099R box one online 4B exception one enter the total distribution on line 4A if you rolled over part or all of the distribution from one Roth IRA to another Roth IRA or IRA other than a Roth IRA to a qualified plan or another IRA other than a Roth IRA so you're gonna have some questions with regards to a rollover type of situation so for example if you've got money under the umbrella of say some type of retirement plan and you wanna take the money out of say that financial institution let's say you have it with a particular financial institution you wanna go to another financial institution or something like that well if you pull the money out then it's possibly gonna be designated as a distribution but you don't want it designated as a distribution because you want to basically just put it into another retirement plan that's still under the umbrella of a retirement plan so you're still kind of in the heart of what the government wants which is to incentivize people to save money for retirement so once it's under the umbrella of like an IRA and you've got the tax benefits on it then you can't distribute it out to yourself or you might be penalized on it but you would think you would be in the spirit of the law if you took the money and just rolled it into another investment account you should have the capacity to decide which investments you want to put them in which financial institutions you wanna put the money in and not be locked into a particular financial investment they're trying to lock you into not taking the money out is the general idea so you have this kind of rollover situation so if there's a rollover if it qualifies as a rollover then you would think it wouldn't be a basically a taxable event as a distribution type of event and that's gonna be really important when you're talking to people that are sick moving from one place to another or they're changing their financial institutions they wanna work with new investment companies or they wanna change their job or something and they've got money tied up under the umbrella of a financial retirement plan of some kind then you wanna be very careful and make sure that you're in alignment with making that transition so it's not reported as a distribution because if it is you could be subject to penalties for early distribution also enter quote rollover end quote next to line four B if the total distribution was rolled over enter zero on line four B if the total distribution wasn't rolled over enter the part not rolled over on line four B unless exception two applies to the part not rolled over generally a rollover must be made within 60 days after the day you receive the distribution so oftentimes when you're looking at this say you're going from one financial institution to another and you're saying I've got all this money under like an IRA in financial institution A in my bank and say I wanna go to E-Trade or some other financial institution or some other bank then you oftentimes you could basically have one financial institution transferred to the other and that would be the cleanest kind of way to do it so it would be qualified as a rollover and very very straightforward however you might be in a situation where you need to draw the money out and if you draw the money out so that you can then put it into another type of investment that you would like under the umbrella of say an IRA then you have a timeframe in terms of how long you can hold on to that money before you have to put it back in place and you wanna make sure again that you're in alignment with it so you don't get subject to a distribution that could be subject to penalties if it's not under some other category of a qualified polling it out so generally a rollover must be made within 60 days after the day you receive the distribution if you rolled over the distribution into a qualified plan or you made the rollover in 2022 include a statement explaining what you did so you could have like a cutoff type of situation where you pulled the money out in 2021 and then you put it back in but it was within the 60 days but you didn't do it until 2022 and so now you were kind of in compliance but in 2021 you had the distribution and not putting it back in so exception two, if any of the following apply enter the total distribution online for A and C form 8606 and its instructions to figure the amount to enter in line for B. One, you received a distribution from an IRA other than a Roth IRA and you made a non-deductible contributions to any of your traditional or SEP IRAs for 2021 or an earlier year. If you made a non-deductible contributions to these IRAs for 2021 you could see publication 590A and publication 590B. Those publications can be found on the IRS website irs.gov. Number two, you received a distribution from a Roth IRA. So the Roth IRA is gonna be a type of IRA that is gonna be kind of like the reverse of a traditional IRA and just note that when you're thinking about kind of tax planning between a Roth kind of and you can have a similar thing with retirement plans. The traditional retirement plan is generally what you would do with an IRA or like a 401K plan is kind of like similar to the theory of an IRA which is the fact that when you put the money in to the IRA then you're gonna get the tax benefit at that point in time. So if you're talking about an IRA that means that you're not taking it through work so that means that you're basically gonna get an adjustment to the income kind of above the line deduction which in essence kind of like lowers the income or you could think of it as a deduction. So that means that you're kind of reducing your income is the way we often think about them with regards to IRA distributions but it's like a deduction at the same point because when you're thinking about W-2 income and the 401K plans which we'll talk about in the future this will all be done on your W-2 income and it will not be in say box one of your W-2 income and it should all be basically taken care of for you. If you're not getting it done through work you might then have an IRA which means you have to reduce the income on the actual 1040 so that's gonna be on schedule one an above the line kind of deduction which is lowering say the adjusted gross income. So you get a benefit at this point in time and then when you pull it out that's when you pay the taxes at the point in time that you pull it out in retirement which means you get this huge deferral which is usually good. However, you might be in a situation where you're saying I'd like the reverse I'd like to pay the taxes now and then when I pull the money out I don't wanna have to pay the taxes when I pull the money out. So that's kind of like the reverse kind of scenario when would the two scenarios be better? The traditional IRA usually if you're in a situation where you're making like you're in the prime of your earning career and you're saying I'm making the most money I'm gonna make at this point in time so what I'd like to do is get the benefits now because my tax brackets will be higher at this point in time so I wanna put as much money away at this point and get as big the deduction as I can and then in retirement my taxes hopefully I'll be able to manage them so my taxable income will be lower in terms of the amount of the income or the amount that I'm spending that is taxable and therefore I'll have a more favorable tax rate so I'll pay the taxes later. That's kind of the idea of the traditional IRA oftentimes the Roth IRA you might be saying hey look at this point in time maybe I'm not making a lot of money but I still have some leftover cash that I could put in to a retirement plan I don't wanna put it into a traditional IRA because I'm paying really low taxes right now because I'm not making a whole lot of money so why would I get the benefit now? Maybe in that case it might be better for me to put it into a Roth IRA pay the taxes on it now and then when it accumulates and I take the money out I get the tax free component at that point in time it also makes it easier when I'm in retirement to have some access to funds that are not subject to taxation when I pull the money out which could help me with tax planning at that point in time or you might be saying hey look I think that the government is spending way too much money right now and at some point they're just gonna have to hike taxes up so whatever my tax rates are right now that could be nothing compared to the tax rate they might be in the future once the government finally says things hit the fan and they have to increase the tax rates so I'd rather pay the tax rates now maybe in that scenario so that's just determined on your predictions into the future what you think is gonna happen so in any case three, you converted part or all of a traditional SEP or simple IRA to a Roth IRA in 2021 so notice that a SEP and a simple these are usually kinds of things that you'll see for smaller types of businesses so if you work for a large company then they're often if they're gonna give you if they have, if you have the capacity to put money into a retirement type of plan it's usually like a 401k and that's usually better than putting money into an IRA if you can put money into a 401k because there might be a matching component to it and you usually have a higher amount that you could put into it so and then smaller companies managing the 401k is usually more costly than it's worth so they might have different options like a SEP or a simple they all have a similar concept in terms of the tax benefit as like a traditional IRA but you have different limitations in terms of how much money you can put into them and so on so for you had a 2020 or 2021 IRA contribution returned to you with a related earnings or less any loss by the due date including extensions of your tax return for that year five you made an excess contribution to your IRA for an earlier year and have them returned to you in 2021 so it's possible you said hey I put too much into the IRA I couldn't get the benefit that I wanted to from it and it was basically returned to you six you recharacterized part or all of a contribution to a Roth IRA as a contribution to another type of IRA or vice versa exception three if all or part of the distribution is a qualified charitable distribution a QCD enter the total distribution online for A if the total amount distributed is a QCD enter zero online for B so if it's a qualified charitable distribution you could have some beneficial treatment in that instance as well if only part of the distribution is a QCD qualified charitable distribution enter the part that is not on a QCD on line for B unless exception two applies to that part enter the qualified charitable distribution next to line for B a QCD is a distribution made directly by the trustee of your IRA other than an ongoing sep or simple IRA to an organization eligible to receive tax deductible contributions with certain exceptions. You must have been at least age 70 and a half when the distribution was made exception number four if all or part of the distribution is a health savings account HSA funding distribution HFD enter the total distribution online for A if the total amount distributed is an HFD and you elect to exclude it from income enter zero online for B if only part of the distribution is an HFD and you elect to exclude that part from income enter the part that isn't an HFD online for B unless exception two applies to that part and HFD is a distribution made directly by the trustee of your IRA other than an ongoing sep or simple IRA to your HSA if eligible you can generally elect to exclude an HFD from your income once in your lifetime you can exclude more than the limit on HSA contributions or more than the amount that would otherwise be included in your income if your IRA includes non deductible contributions the HFD is first considered to be paid out of the otherwise taxable income if this is going to be applicable to you or if you want to look into it in more detail you can take a look at publication 969 for more detail you can find on the IRS website exception number four more than one exception applies if more than one exception applies include a statement showing the amount of each exception so you can now see we've got these exceptions that are applying if you have multiple exceptions that are applying then you're going to need to add on a statement explaining to the IRS what is going on with them instead of making an entry next to line four B for example line four B 1000 rollover and 500 HFD but you do not need to attach a statement if only exception two and one other exception apply more than one distribution if you or your spouse if filing jointly received more than one distribution figure the taxable amount of each distribution and enter the total of the taxable amounts on line four B enter the total amount of these distributions on line four A more information so for more information if you're applying out to some of these more complex type of scenarios you can find more information about them on the publication 590 A and publication 590 B you can find those on the IRS website IRS.gov