Page 88 - 2020 Publication 17

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Only the part of the distribution that repre- • Taking early distributions. • Stamps, 14:38 - 19-Jan-2021
sents nondeductible contributions and rolled • Allowing excess amounts to accumulate • Coins,
over after-tax amounts (your cost basis) is tax (failing to take required distributions).
free. If nondeductible contributions have been • Alcoholic beverages, and
made or after-tax amounts have been rolled There are penalties for overstating the • Certain other tangible personal property.
over to your IRA, distributions consist partly of amount of nondeductible contributions and for
nondeductible contributions (basis) and partly failure to file a Form 8606, if required. Exception. Your IRA can invest in one-,
of deductible contributions, earnings, and gains one-half-, one-quarter-, or one-tenth-ounce
(if there are any). Until all of your basis has Prohibited Transactions U.S. gold coins, or one-ounce silver coins min-
been distributed, each distribution is partly non- ted by the Treasury Department. It can also in-
taxable and partly taxable. Generally, a prohibited transaction is any im- vest in certain platinum coins and certain gold,
Form 8606. You must complete Form 8606 proper use of your traditional IRA by you, your silver, palladium, and platinum bullion.
beneficiary, or any disqualified person.
and attach it to your return if you receive a distri- Disqualified persons include your fiduciary
bution from a traditional IRA and have ever and members of your family (spouse, ancestor, Excess Contributions
made nondeductible contributions or rolled over lineal descendent, and any spouse of a lineal
after-tax amounts to any of your traditional descendent). Generally, an excess contribution is the amount
IRAs. Using the form, you will figure the nontax- contributed to your traditional IRA(s) for the
able distributions for 2020 and your total IRA The following are examples of prohibited year that is more than the smaller of:
basis for 2020 and earlier years. transactions with a traditional IRA. • The maximum deductible amount for the
• Borrowing money from it; see Pub. 590-B. year (for 2020, this is $6,000 ($7,000 if you
Note. If you are required to file Form 8606, are 50 or older)); or
but you aren't required to file an income tax re- • Selling property to it.
turn, you must still file Form 8606. Send it to the • Using it as security for a loan. • Your taxable compensation for the year.
IRS at the time and place you would otherwise • Buying property for personal use (present An excess contribution could be the result of
file an income tax return. or future) with IRA funds. your contribution, your spouse's contribution,
Distributions reported on Form 1099-R. If Effect on an IRA account. Generally, if you or your employer's contribution, or an improper
you receive a distribution from your traditional your beneficiary engages in a prohibited trans- rollover contribution. If your employer makes
IRA, you will receive Form 1099-R, Distributions action in connection with your traditional IRA contributions on your behalf to a SEP IRA, see
From Pensions, Annuities, Retirement or account at any time during the year, the ac- chapter 2 of Pub. 560.
Profit-Sharing Plans, IRAs, Insurance Con- count stops being an IRA as of the first day of Tax on excess contributions. In general, if
tracts, etc., or a similar statement. IRA distribu- that year. the excess contributions for a year aren't with-
tions are shown in boxes 1 and 2a of Form drawn by the date your return for the year is due
1099-R. The number or letter codes in box 7 tell Effect on you or your beneficiary. If your ac- (including extensions), you are subject to a 6%
you what type of distribution you received from count stops being an IRA because you or your tax. You must pay the 6% tax each year on ex-
your IRA. beneficiary engaged in a prohibited transaction, cess amounts that remain in your traditional IRA
Withholding. Federal income tax is withheld the account is treated as distributing all its as- at the end of your tax year. The tax can't be
sets to you at their fair market values on the first
from distributions from traditional IRAs unless day of the year. If the total of those values is more than 6% of the combined value of all your
you choose not to have tax withheld. See chap- more than your basis in the IRA, you will have a IRAs as of the end of your tax year. The addi-
ter 4. taxable gain that is includible in your income. tional tax is figured on Form 5329.
IRA distributions delivered outside the For information on figuring your gain and report- Excess contributions withdrawn by due
date of return. You won't have to pay the 6%
United States. In general, if you are a U.S. citi- ing it in income, see Are Distributions Taxable, tax if you withdraw an excess contribution made
zen or resident alien and your home address is earlier. The distribution may be subject to addi- during a tax year and you also withdraw interest
outside the United States or its possessions, tional taxes or penalties. or other income earned on the excess contribu-
you can't choose exemption from withholding Taxes on prohibited transactions. If some- tion. You must complete your withdrawal by the
on distributions from your traditional IRA. one other than the owner or beneficiary of a tra- date your tax return for that year is due, includ-
Reporting taxable distributions on your re- ditional IRA engages in a prohibited transaction, ing extensions.
turn. Report fully taxable distributions, includ- that person may be liable for certain taxes. In
ing early distributions, on Form 1040 or general, there is a 15% tax on the amount of the How to treat withdrawn contributions.
1040-SR, line 4b (no entry is required on Form prohibited transaction and a 100% additional Don't include in your gross income an excess
1040 or 1040-SR, line 4a). If only part of the dis- tax if the transaction isn't corrected. contribution that you withdraw from your tradi-
tribution is taxable, enter the total amount on More information. For more information on tional IRA before your tax return is due if both
Form 1040 or 1040-SR, line 4a, and the taxable prohibited transactions, see What Acts Result the following conditions are met.
part on Form 1040 or 1040-SR, line 4b. in Penalties or Additional Taxes? in chapter 1 of • No deduction was allowed for the excess
Pub. 590-A. contribution.
What Acts Result in • You withdraw the interest or other income
Penalties or Additional Investment in Collectibles earned on the excess contribution.
Taxes? If your traditional IRA invests in collectibles, the You can take into account any loss on the con-
amount invested is considered distributed to tribution while it was in the IRA when figuring
The tax advantages of using traditional IRAs for you in the year invested. You may have to pay the amount that must be withdrawn. If there was
retirement savings can be offset by additional the 10% additional tax on early distributions, a loss, the net income you must withdraw may
taxes and penalties if you don't follow the rules. discussed later. be a negative amount.
There are additions to the regular tax for us- Collectibles. These include:
ing your IRA funds in prohibited transactions. How to treat withdrawn interest or other
There are also additional taxes for the following • Artworks, income. You must include in your gross in-
activities. • Rugs, come the interest or other income that was
earned on the excess contribution. Report it on
• Investing in collectibles. • Antiques, your return for the year in which the excess con-
• Having unrelated business income; see • Metals, tribution was made. Your withdrawal of interest
Pub. 590-B. • Gems, or other income may be subject to an additional
• Making excess contributions. 10% tax on early distributions, discussed later.
Page 84 Chapter 9 Individual Retirement Arrangements (IRAs)