"David Jensen" <djnews1[at]xxhealthcare.com> writes:

- quote -

No. All distributions from traditional IRAs (including
SEPs) are taxable as ordinary income unless nondeductible
CONTRIBUTIONS have been made. There is no other distinction
regarding the source of the funds being distributed.

Phil Marti
Clarksburg, MD

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- quote -

So in year n+5 the account was worth $0, in year n+6 you did
another $100K conversion, and in year n+7 you wanted to take
out money?

The answer would not change. The first $100K coming out of
the account would escape the 10% early withdrawal penalty
because of the ordering rules. It is deemed to be a return
of the first conversion and the 5 year clock on the first
conversion would have expired by then. Like I said -- it's
a black box inside.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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rlcarr[at]animato.arlington.ma.us (Rich Carreiro) writes:

- quote -

Good. Just to pin this down 100%, assume that due to my
incredibly inept investing the actual account value in year
n+5 was $0. Would the answer change?

Dan Lanciani
ddl[at]danlan.*com

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ddl[at]danlan.*com (Dan Lanciani) writes:

- quote -

$100,000 (the first conversion).

Each conversion has a separate 5-year clock attached to it.
In year n+7, the 5-year clock on the first conversion has
expired, so no penalty on withdrawal of it.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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- quote -

[snipping comments on regular IRA]

- quote -

In another thread it was suggested that you need to track
the transactions within a Roth IRA in order to answer
questions of this form:

In year n I open a Roth IRA and convert $100k from a
conventional IRA.

In year n+6 I convert an additional $100k to the same Roth
IRA account.

In year n+7 the Roth IRA account is worth $180k. If I am
under 59 1/2, how much may I withdraw from the Roth IRA
without penalty? (There were no
contributions/conversions/withdrawals other than those
listed.)

What additional information (if any) do I need to answer
this question?

Dan Lanciani
ddl[at]danlan.*com

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Dan Lanciani wrote:
- quote -

Yes, and 401k plans also.

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- quote -

It's ALMOST the same. In a regular IRA you put money in
(some of which may have already been taxed) and it hopefully
earns more. When you take it out, they shake up the box
first so you take out a blend of your original money (some
of which may have already been taxed) and the earnings. You
pay tax at ordinary rates on the earnings as well as the
money you put in (but only on the portion that hasn't
already been taxed.)

In a Roth you put money in that has already been taxed, or
you put money in by converting a regular IRA to a Roth and
paying the tax on it. Then hopefully it earns more. When
you take money out, they don't shake up the box -- your
contributions come out first, then the conversions, and
finally the earnings. You don't pay tax on any of it unless
you pull it out too soon. In that case you don't pay a
penalty on your contributions, you may pay a penalty on the
conversions, and you do pay a penalty on the earnings.

--
Don EA in Upstate NY

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rlcarr[at]animato.arlington.ma.us (Rich Carreiro) writes:

- quote -

Is this (black box treatment) true for the Roth IRA as well?

Dan Lanciani
ddl[at]danlan.*com

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David Jensen wrote:

- quote -

NO. The SEP-IRA was funded with Tax-deferred (not Tax Free)
funds. All dividends or interest received by the account are
taxable when withdrawn or converted to a Roth IRA.

- quote -

The same thing I said above. You might not pay tax on them,
if in a taxable account, but this is an IRA (which has no
basis to begin with).

- quote -

It is not appropriate.

- quote -

No discrepancy. You're chasing a wrong assumption.

- quote -

Only if you try to claim such.

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David Jensen <djnews1[at]xxhealthcare.com> wrote:

- quote -

Return of capital or interest or dividends or royalty
payments or rental income or any other income within an IRA
is ignored.

When you converted the IRA to the Roth, you used Form 8606
to calculate the amount of ordinary income to recognize on
this conversion. It made no difference how the SEP IRA grew
to its present value.

So just ignore the fact that the IRA itself received return
of principal, which in an ordinary account would reduce cost
basis until basis is reduced to zero, and then be treated as
capital gain.

__
Art Kamlet ArtKamlet [at] AOL.com Columbus OH K2PZH

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"David Jensen" <djnews1[at]xxhealthcare.com> writes:

- quote -

No.

- quote -

The IRS says (well, actually Congress says it since Congress
writes the laws) that if you have not made any
non-deductible contributions to any traditional IRA or
SEP-IRA accounts, every single dollar distributed (or
converted to a Roth IRA) is taxable. The nature of growth
in the IRA is irrelevant. In other words, IRAs convert all
income, even tax-exempt income, to ordinary income.

IRAs are a black box. All that matters is what goes in and
what comes out. What happens inside of them is completely
ignored and irrelevant (unless a prohibited transaction is
engaged in).

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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If one converts an Sep-IRA to a Roth IRA and the Sep-IRA
contains growth from dividends that were classed as "return
of capital" and therefore not taxable even if they were not
in an IRA, would the amount taxable in the Roth IRA
conversion be reduced by these non-taxable funds? Common
sense would say that you shouldn't pay tax on them but what
does the IRS say?

If it is appropriate to reduce your Roth IRA conversion
taxable amount by any non taxable dividends, doesn't that
create a discrepancy between what you show on your return
and what the IRS would see on whatever form the brokerage
sends to the IRS showing the conversion? Are there any
lines on the forms that the individual submits with his
return to reconcile this discrepancy? If not, does the
discrepancy increase the chance of an audit?

Thanks and keep up the good work. I appreciate you folks.

--
David Jensen
Replace the xx in my E-mail address with "Team" for my real E-mail address

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