Investment Account or Self Directed RET

[britgeezer]

I'm confused. I opened an investment account with Chase to have a little fun in the stock market. Now instead of being a simple brokerage account it seems I'm in a RET.

I don't have a lot of money invested, but even though this is after tax money it seems that I will pay tax on any gross distribution, irrespective of profit or loss.

As an example, I withdrew $500 I put in the account by mistake just a week later - now I have a 1099-R for $500!

I didn't want to contribute to a retirement account, I'm 70 and getting distribution from an annuity, I feel mislead by Chase.

Any suggestions on how to exit this situation without incurring excessive tax?

Thanks

[GeorgeM777 · Accepted solution]

We cannot offer an opinion regarding the quality of the service you received from Chase, or the merits of whether you should have a retirement account.  However, we can provide some advice regarding the tax considerations now that you have a 1099-R. 

Assuming this was a traditional IRA, you may not owe any tax on the $500 that you withdrew from the account.  You indicated that the money used to fund the account was after-tax money, and that is an important fact because knowing what that amount is, will help you determine your basis in your IRA.  Once you know your basis, essentially the amount of the after-tax funds you deposited into the account, then you will have a starting point from which you can begin to determine what amount of that $500 is taxable.  Keep in mind that you may not need to pay tax on the funds withdrawn, but rather, only the amount in excess of your basis. 

The problem you might confront is that your 1099-R will not tell you what portion of that $500 distribution is taxable.  Consequently, if you report the gross distribution, you may be paying more tax than the law demands.

Fortunately, TurboTax will calculate how much tax you will owe on the $500 withdrawn from your IRA.  Go to the Wages & Income section of TurboTax and scroll down to the Retirement Plans and Social Security section.  Select the option for IRA and respond to the questions as you move through that section.  Once completed, you will know what, if any, tax you owe on the funds withdrawn from your IRA.  

[britgeezer]

Much appreciate the reply.

Bank has confirmed its a conventional IRA - my bad.

It took me a while to understand the meaning of your words - now I'm looking for explanations of how to determine my basis. I will use goggle but if you know of a link to help me, it would be appreciated.

[britgeezer]

Found a reasonable article on calculating basis, but a couple of points are unclear.

1. Where the article states add all nondeductible contributions together, is it for 2021 only or since inception (2020). 100% of contributions were nondeductible (after tax money) and my annuity income in 2021 was over the contribution deductible limit anyway.
2. Where there was 2021 income posted (short term gain) and reinvested, how is that treated?

Thanks.

[britgeezer]

Ouch,

I did what TT suggested and entered my contributions for 2021.

Since I'm retired, I have $0 earned income and good annuity / pension /SS income so TT informs me I have excess IRA contributions - everything I put in.

To avoid a 6% penalty, I have to withdraw it all before Tax. Not the end of the world it's not a large sum. But heh,

I earned all my income in previous years - unearned is not fair.

At least I know my cost basis for next year,