Last year, I overcontributed to a Roth IRA, purchased some securities with the overcontribution, realized the issue, & did a "Removal of Excess" with my brokerage prior to the filing deadline. For the "Removal of Excess", I removed the securities (shares of stock). The shares were at a loss.
My question: when I sell those shares (now in a taxable account), do I report the original cost basis from when they were originally bought (at that time, in the Roth IRA)? Meaning that I can realize a taxable loss on next year's tax return?
That seems like the most sensible approach - the only other possibility might be to report the cost basis as the price on on the day they were removed, but that doesn't seem correct.
I did contact my brokerage, and they said the following: "When the shares were originally bought in the Roth IRA, they were “uncovered,” which means the cost basis doesn’t get reported to the IRS. When transferring the shares out of the account, the non-covered status carries forward with them to the new account, so when sold, the brokerage won’t report the cost basis to the IRS." In other words, I'm responsible for putting my own cost basis when filing my taxes. The brokerage was able to transfer the original purchase date & cost basis of the shares, so I can see that original price in my account on their web UI. The basis just won't be reported to the IRS.
So again, I just wanted to confirm that when I sell, I report the original cost basis from the date that it was originally purchased (while inside the Roth IRA), and not the cost basis on the day that they were removed.
An interesting question.
Since you are
a) required to take the loss and
b) considered to have removed the entire excess (e.g. $6,000 for max contributors)
your basis in the stock should be your purchase price.
I agree an interesting question, the rules say you should have withdrawn the excess contribution less the allocated loss. thus had you withdrawn cash you would have something less than the $6K so perhaps the proper tax basis is the FMV on date removed and the loss stays in the Roth. Here's from another thread
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If you withdrew your 2022 excess contribution to your Roth IRA before the due date of the 2022 tax return (April 18, 2023), make sure that you also withdraw the related earnings/losses. You have already done this.
On your 2022 tax return, you do not report the excess contribution as it has been withdrawn. The earnings have to reported and taxed in 2022. These earnings are also subject to 10% early withdrawal penalty if you are younger than 59 1/2.
If there is a loss, that loss is not deductible.
The conservative answer is the basis is the value when it comes out. and date acquired is that date.
the liberal answer is the cost to buy.
IRS is not going to audit you.
Your investment may rise in value. is it a good stock or a junk stock?
> Your investment may rise in value. is it a good stock or a junk stock?
Junk. I'd rather sell & reallocate the capital elsewhere.
Hmm...so it sounds like one vote for each approach (aka fanfare thinks cost basis could be the original purchase cost basis, Mike thinks cost basis should be value at the time of removal). TD's staff did also say the former (actually on a couple different calls), though of course their disclaimer: "we're not tax professionals."
I think my takeaway is that it's potentially a little ambiguous, we don't have a 100% concrete IRS rule that says one approach is right and the other is wrong, and one could probably make a reasonable argument for either treatment. Does that sound right?
Ignoring any transaction fees, an in-kind distribution from an IRA is equivalent to selling the shares within the IRA, distributing the cash and then repurchasing the shares outside the IRA.
If the IRA contained anything other than these shares, it's almost certain that an in-kind distribution of exactly the number of shares purchased with the excess contribution would not satisfy the requirements to be a return of contribution before the due date of the tax return. To satisfy the requirements, the adjusted dollar amount required to be distributed as a return of contribution would have to be determined based on teh performance of the entire account and then some number of shares that have a current value equal to the adjusted amount would have to be distributed.
I read that a few times, not able to fully make sense of it as a non-tax-professional. My best interpretation is that dmertz's vote is that when I sell the shares, the cost basis is not the cost that I paid for the shares. The cost basis is the value on the day they were removed from the Roth IRA. Or put another way: dmertz agrees with Mike, disagrees with TD brokerage & fanfare. I think.
Regardless of what I suggested earlier ---
If you remove stock in-kind from an IRA, the basis is the value on the day it comes out of the IRA.
It shouldn't matter if you are taking it out as a regular distribution or a return of excess.
It shouldn't matter if the IRA is a Roth IRA or a Traditional IRA.
If you take an excess contribution out in cash, and negative earnings reduce your amount returned to you, the negative earnings are gone, You can't deduct it as a loss.
The withdrawal of excess in-kind can also result in a loss, which would not be deductible.
Just as a matter of fairness, the treatment of a withdrawal in-kind must be similar to a withdrawal in cash.
So if I'm understanding correctly:
"your basis in the stock should be your purchase price" (original answer) -> isn't correct, you now agree that my basis in the stock can't be my purchase price, but has to be the price was on the day that TD removed it?
Bummer.
you cannot "realize" gains or losses in an IRA, except when you withdraw positive earnings allocable to an excess contribution.
How to calculate earnings or losses
The IRS provides a specific formula — Net Income Attributable (NIA) — that must be applied to calculate earnings or losses attributable to an excess contribution.
Net Income = Excess to be removed x (Adjusted Closing Balance (ACB) – Adjusted Opening Balance (AOB))/
Adjusted Opening Balance (AOB)
Here’s how to determine the numbers to plug into the NIA formula: To determine the adjusted opening balance, add to the prior month end IRA balance all contributions (including the contribution creating the excess), consolidations, and transfers into the account since the contribution occurred. To determine the adjusted closing balance, subtract from the current value of the IRA all distributions, consolidations, and transfers in since the contribution occurred
here are a couple of examples:
Example 1
Linda, age 48, contributed $7,000 to her IRA last year. When filing taxes, she discovers she was eligible to contribute only $6,000. She requests to remove the $1,000 excess. Her IRA balance prior to the contribution was $22,000 and is now worth $31,750. She made no additional contributions or distributions. Her ACB is $31,750 and her AOB is $29,000 ($22,000 + $7,000). Linda will remove the $1,094.83 ($1000 excess contribution + $94.83 earnings attributable to the excess contribution).
$1,000 x ($31,750 - 29,000)/29000 = $1,000 x $2,750 / $29,000 = $94.83 NIA = $94.83 earnings
Example 2
Zeke, age 62, contributed $7,000 to his IRA last year. When filing taxes, he discovers that due to his amount of earned income, he was only eligible to contribute $4,500. He requests to remove the $2,500 excess. His IRA balance prior to the contribution was $260,000 and is now worth $250,675. He made no additional contributions or distributions. His ACB is $250,675 and his AOB is $267,000 ($260,000 + $7,000). Zeke will remove $2,347.14 ($2,500 excess contribution - $152.86 loss attributable to the excess contribution).
$2,500 x ($250,675 - 267,000) / 267,000= $2,500 x -$16,325 / 267,000 = -$152.86 NIA
source: https://www08.wellsfargomedia.com/assets/pdf/personal/goals-retirement/taxes-and-retirement-planning/correct-excess-IRA-contributions.pdf#:~:text=The%20IRS%20provides%20a%20specifc%20formula%E2%80%94Net%20Income%20Attributable,Closing%20Balance%20%28ACB%29%20%E2%80%93%20Adjusted%20Opening%20Balance%20%28AOB%29
the same formula applies to a ROTH
https://meetbeagle.com/resources/post/how-to-calculate-earnings-on-excess-roth-ira-contributions
we have no way of knowing whether the amount you withdrew conforms to the above.
"we have no way of knowing whether the amount you withdrew conforms to the above."
Having withdrawn "in-kind" at a loss, the withdrawal must be conforming.
maybe maybe not. say the excess is $1000 and the allocable loss is $100 so the inkind distribution would need to be $900. what if the value of the securities withdrwan was $800 or $2000?
@Mike9241 is right. NIA is determined by the investment performance over the entire account, not by any one investment within the account. Only if there was nothing else in the account would an in-kind distribution of these shares satisfy the NIA calculation requirements for a return of contribution.
> we have no way of knowing whether the amount you withdrew conforms to the [NIA calculation] above.
The brokerage provides a "Removal-of-Excess Form", with a checkbox to have them calculate the earnings per the NIA formula. I used that. In other words: I didn't manually calculate the NIA, I only told them the amount of excess contribution, and TD Ameritrade calculated the earnings/loss & determined the final value of shares to remove.
So it sounds like they did do the NIA calculation and then translated the dollar amount into some number of shares (different than the number of shares originally purchased with the excess contribution if there were other amounts in the account over which the NIA was required to be calculated) having a current total value equal to the amount required to be distributed. That would be fine. As I said, ignoring transaction costs, if any, that would be equivalent to selling the same number of shares inside the IRA, distributing the exact adjusted amount in cash, and then repurchasing the shares outside the IRA.
However, stock is not usually bought and sold in fractional shares, so to do this with whole shares the return of contribution would have to be accompanied by some amount of regular distribution to account for the additional fractional share needed to make a whole share. If the in-kind distribution was able to consist of fractional shares such as is possible with a mutual fund, this wouldn't be an issue.
Given all of the complications, I would never suggest that anyone do an in-kind distribution for a return of contribution. It serves no purpose other than to avoid a round-trip sale and repurchase and to ensure the that transaction is completed timely such that the cost basis of the shares outside the IRA is the same as the distributed value.
> stock is not usually bought and sold in fractional shares, so to do this with whole shares the return of contribution would have to be accompanied by some amount of regular distribution to account for the additional fractional share needed to make a whole share. If the in-kind distribution was able to consist of fractional shares such as is possible with a mutual fund, this wouldn't be an issue.
The removal was done with exact fractional shares. It was not a mutual fund, it was an ETF, and they removed fractional shares.
> I would never suggest that anyone do an in-kind distribution for a return of contribution. It serves no purpose other than to avoid a round-trip sale and repurchase and to ensure the that transaction is completed timely such that the cost basis of the shares outside the IRA is the same as the distributed value.
Originally my plan was to just sell shares and remove the cash. However, when I received the Removal of Excess form from TD, and saw that it allows me to list other assets to be removed, I called TD to ask the exact question in the original post: if I remove shares, does it transfer the original cost basis out of the account such that when I sell the shares (now in a taxable account), I use the original cost basis of the shares when they were purchased, and thus can realize the loss. I was told yes, that's how it works. I hung up and called two more times to ask the same question to two more staffmembers to be sure. That was the purpose.
"The removal was done with exact fractional shares. It was not a mutual fund, it was an ETF, and they removed fractional shares." That works then. (Your original post indicated that they were stock shares.) IRS guidance does provide that the return of contribution can be accomplished by a distribution of assets having a current value equal to the dollar amount required as a result of the NIA calculation.
The only case where original cost basis of an investment in a retirement account is taken into account upon distribution is when a distribution of employer stock shares from an employer-provided retirement plan like a 401(k) qualifies for distribution of Net Unrealized Appreciation as part of a lump-sum distribution under section 402(e)(4) of the tax code (which has nothing to do with IRAs). Otherwise, cost basis of a particular investment in a retirement account is meaningless.