Taxmap/pubs/p590-012.htm#TXMP59961195
Are Distributions Taxable?

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Note.If you are required to file Form 8606, but you are not required to file an income tax return, you still must file Form 8606. Complete Form 8606, sign it, and send it to the IRS at the time and place you would otherwise file an income tax return.

Taxmap/pubs/p590-012.htm#TXMP3243f142 Figuring the Nontaxable   and Taxable Amounts

Nontaxable and Taxable Amounts

If your traditional IRA includes nondeductible contributions and you received a distribution from it in 2004, you must use Form 8606 to figure how much of your 2004 IRA distribution is tax free.

Taxmap/pubs/p590-012.htm#TXMP374c597d Contribution and distribution in the same year.

If you received a distribution in 2004 from a traditional IRA and you also made contributions to a traditional IRA for 2004 that may not be fully deductible because of the income limits, you can use Worksheet 1-5 to figure how much of your 2004 IRA distribution is tax free and how much is taxable. Then you can figure the amount of nondeductible contributions to report on Form 8606. Follow the instructions under Reporting your nontaxable distribution on Form 8606, next, to figure your remaining basis after the distribution.

Taxmap/pubs/p590-012.htm#TXMP3ee382c6 Reporting your nontaxable distribution on Form 8606.

To report your nontaxable distribution and to figure the remaining basis in your traditional IRA after distributions, you must complete Worksheet 1-5 before completing Form 8606. Then follow these steps to complete Form 8606.

• Use the IRA Deduction Worksheet in the Form 1040 or 1040A instructions to figure your deductible contributions to traditional IRAs to report on line 25 of Form 1040 or line 17 of Form 1040A.
• After you complete the IRA deduction worksheet in the form instructions, enter your nondeductible contributions to traditional IRAs on line 1 of Form 8606.
• Complete lines 2 through 5 of Form 8606.
• If line 5 of Form 8606 is less than line 8 of Worksheet 1-5, complete lines 6 through 15 of Form 8606 and stop here.
• If line 5 of Form 8606 is equal to or greater than line 8 of Worksheet 1-5, follow instructions 6 and 7, next. Do not complete lines 6 through 12 of Form 8606.
• Enter the amount from line 8 of Worksheet 1-5 on lines 13 and 17 of Form 8606.
• Complete line 14 of Form 8606.
• Enter the amount from line 9 of Worksheet 1-5 (or, if you entered an amount on line 11, the amount from that line) on line 15 of Form 8606.

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Example.

Rose Green has made the following contributions to her traditional IRAs.

Year	Deductible	Nondeductible
1997	$2,000	-0-
1998	2,000	-0-
1999	2,000	-0-
2000	1,000	-0-
2001	1,000	-0-
2002	1,000	-0-
2003	700	$ 300
Totals	$9,700	$ 300

In 2004, Rose, whose IRA deduction for that year may be reduced or eliminated, makes a $2,000 contribution that may be partly nondeductible. She also receives a distribution of $5,000 for conversion to a Roth IRA. She completed the conversion before December 31, 2004, and did not recharacterize any contributions. At the end of 2004, the fair market values of her accounts, including earnings, total $20,000. She did not receive any tax-free distributions in earlier years. The amount she includes in income for 2004 is figured on Worksheet 1-5, Figuring the Taxable Part of Your IRA Distribution—Illustrated.

The Form 8606 for Rose, illustrated, shows the information required when you need to use Worksheet 1-5 to figure your nontaxable distribution. Assume that the $500 entered on Form 8606, line 1 is the amount Rose figured using instructions 1 and 2 given earlier under Reporting your nontaxable distribution on Form 8606.

Taxmap/pubs/p590-012.htm#TXMP32843934 Recognizing Losses on Traditional IRA Investments

Traditional IRA

If you have a loss on your traditional IRA investment, you can recognize (include) the loss on your income tax return, but only when all the amounts in all your traditional IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis, if any. Your basis is the total amount of the nondeductible contributions in your traditional IRAs. You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A, Form 1040.

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Example.

Bill King has made nondeductible contributions to a traditional IRA totaling $2,000, giving him a basis at the end of 2003 of $2,000. By the end of 2004, his IRA earns $400 in interest income. In that year, Bill receives a distribution of $600 ($500 basis + $100 interest), reducing the value of his IRA to $1,800 ($2,000 + 400 − 600) at year's end. Bill figures the taxable part of the distribution and his remaining basis on Form 8606 (illustrated).

In 2005, Bill's IRA has a loss of $500. At the end of that year, Bill's IRA balance is $1,300 ($1,800 − 500). Bill's remaining basis in his IRA is $1,500 ($2,000 − 500). Bill receives the $1,300 balance remaining in the IRA. He can claim a loss for 2005 of $200 (the $1,500 basis minus the $1,300 distribution of the IRA balance).

Taxmap/pubs/p590-012.htm#TXMP41ccdca7 Other Special IRA   Distribution Situations

Special IRA Distribution Situations

Two other special IRA distribution situations are discussed below.

Taxmap/pubs/p590-012.htm#TXMP3fd927dc Distribution of an annuity contract from your IRA account.

You can tell the trustee or custodian of your traditional IRA account to use the amount in the account to buy an annuity contract for you. You are not taxed when you receive the annuity contract. You are taxed when you start receiving payments under that annuity contract.

Taxmap/pubs/p590-012.htm#TXMP2d3087cc Tax treatment.

If only deductible contributions were made to your traditional IRA since it was set up (this includes all your traditional IRAs, if you have more than one), the annuity payments are fully taxable.

If any of your traditional IRAs include both deductible and nondeductible contributions, the annuity payments are taxed as explained earlier under Distributions Fully or Partly Taxable.

Taxmap/pubs/p590-012.htm#TXMP2abcf82f Cashing in retirement bonds.

When you cash in retirement bonds, you are taxed on the entire amount you receive. Unless you have already cashed them in, you will be taxed on the entire value of your bonds in the year in which you reach age 701/2. The value of the bonds is the amount you would have received if you had cashed them in at the end of that year. When you later cash in the bonds, you will not be taxed again.

Taxmap/pubs/p590-012.htm#TXMP28526203 Reporting and Withholding Requirements for Taxable Amounts

Reporting and Withholding Requirements for Taxable Amounts

If you receive a distribution from your traditional IRA, you will receive Form 1099-R, or a similar statement. IRA distributions are shown in boxes 1 and 2 of Form 1099-R. A number or letter code in box 7 tells you what type of distribution you received from your IRA.

Taxmap/pubs/p590-012.htm#TXMP086a7fb3 Number codes.

Some of the number codes are explained below. All of the codes are explained in the instructions for recipients on Form 1099-R.

• 1—Early distribution, no known exception.
• 2—Early distribution, exception applies.
• 3—Disability.
• 4—Death.
• 5—Prohibited transaction.
• 7—Normal distribution.
• 8—Excess contributions plus earnings/  
    excess deferrals (and/or earnings)  
    taxable in 2004.

If code 1, 5, or 8 appears on your Form 1099-R, you are probably subject to a penalty or additional tax. If code 1 appears, see Early Distributions, later. If code 5 appears, see Prohibited Transactions, later. If code 8 appears, see Excess Contributions, later.

Taxmap/pubs/p590-012.htm#TXMP64dad31b Letter codes.

Some of the letter codes are explained below. All of the codes are explained in the instructions for recipients on Form 1099-R.

• D—Excess contributions plus earnings/  
    excess deferrals taxable in 2002.
• G—Direct rollover to a qualified plan, a tax-sheltered  
    annuity, a governmental 457(b) plan, or an IRA. May  
     also include a transfer from a conduit IRA to a  
     qualified plan.
• J—Early distribution from a Roth IRA.
• N—Recharacterized IRA contribution made for 2004  
    and recharacterized in 2004.
• P—Excess contributions plus earnings/  
    excess deferrals taxable in 2003.
• Q—Roth IRA qualified distribution.
• R—Recharacterized IRA contribution made for 2003  
    and recharacterized in 2004.
• S—Early distributions from a SIMPLE IRA in first  
    2 years, no known exception.
• T—Roth IRA distribution, exception applies.

If the distribution shown on Form 1099-R is from your IRA, SEP-IRA, or SIMPLE IRA, the small box in box 7 (labeled IRA/SEP/SIMPLE) should be marked with an "X."

If code D, J, P, or S appears on your Form 1099-R, you are probably subject to a penalty or additional tax. If code D appears, see Excess Contributions, later. If code J appears, see Early Distributions, later. If code P appears, see Excess Contributions, later. If code S appears, see Additional Tax on Early Distributions in chapter 3.

Taxmap/pubs/p590-012.htm#TXMP717ab3b1 Withholding.

Federal income tax is withheld from distributions from traditional IRAs unless you choose not to have tax withheld.

The amount of tax withheld from an annuity or a similar periodic payment is based on your marital status and the number of withholding allowances you claim on your withholding certificate (Form W-4P). If you have not filed a certificate, tax will be withheld as if you are a married individual claiming three withholding allowances.

Generally, tax will be withheld at a 10% rate on nonperiodic distributions.

Taxmap/pubs/p590-012.htm#TXMP2478cbce IRA distributions delivered outside the United States.

In general, if you are a U.S. citizen or resident alien and your home address is outside the United States or its possessions, you cannot choose exemption from withholding on distributions from your traditional IRA.

To choose exemption from withholding, you must certify to the payer under penalties of perjury that you are not a U.S. citizen, a resident alien of the United States, or a tax-avoidance expatriate.

Even if this election is made, the payer must withhold tax at the rates prescribed for nonresident aliens.

Taxmap/pubs/p590-012.htm#TXMP7922217f More information.

For more information on withholding on pensions and annuities, see Pensions and Annuities in chapter 1 of Publication 505, Tax Withholding and Estimated Tax. For more information on withholding on nonresident aliens and foreign entities, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

Taxmap/pubs/p590-012.htm#TXMP29eae5a8 Reporting taxable distributions on your return.

Report fully taxable distributions, including early distributions, on Form 1040, line 15b (no entry is required on line 15a), or Form 1040A, line 11b. If only part of the distribution is taxable, enter the total amount on Form 1040, line 15a (or Form 1040A, line 11a), and the taxable part on line 15b (or line 11b). You cannot report distributions on Form 1040EZ.

Taxmap/pubs/p590-012.htm#TXMP6f24a372 Estate tax.

Generally, the value of an annuity or other payment receivable by any beneficiary of a decedent's traditional IRA that represents the part of the purchase price contributed by the decedent (or by his or her former employer(s)), must be included in the decedent's gross estate. For more information, see the instructions for Schedule I, Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.