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Basis in Traditional/SIMPLE IRAs?


Guest Bubby
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Would it ever be possible for after-tax dollars to make it into a SIMPLE IRA? It seems that all employee deferrals and employer contributions would be and would always have been pre-tax and, since only SIMPLE IRAs can be rolled into SIMPLE IRAs, there doesn't appear to be any way for a person to have basis in a SIMPLE IRA. Is this correct or am I missing something?

Thanks for any input!

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Arguably, the same tax results apply to distributions from a Simple-IRA as apply to distributions from a traditional IRA; that is, they are generally taxable except to the extent of any pro-rata basis. Such would occur for example when an excess contribution is made and the excess is reported on Form W-2 (or picked up in income and not deducted). See General Explanation of Tax Legislation Enacted in the 104th Congress (JCT-12--96), page 141 (the 1996 Blue Book). Special rules apply during the first two years. It should be noted that the 6 percent tax does not seem to apply to SIMPLE-IRAs. Excess amounts removed after the due date may, however, be subject to double taxation since 408(d)(5) does not increase the amount allowed to be withdrawn as it does for a SEP. The simple-ira excess rules are not explained very well in official guidance. See, too, Notice 98-4, Q&A I-2.

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Guest Fishchick

Also, wouldn't any basis in ANY Traditional IRA potentially be attributed to a distribution that actually came from a SIMPLE plan account. The rules for determining the pro-rata amount have you compare your basis in all Traditional IRA's versus the balance in all Traditional IRA's, including both SEP and SIMPLE plans. So yes, theoretically, a distribution from a SIMPLE could include basis, even though no after-tax monies were ever contributed to the SIMPLE assuming there were basis from non-deductible contributions and/or a rollover of after-tax monies in another Traditional IRA account.

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Gary,

A SIMPLE IRA may not be a Traditional IRA but I believe the distribution rules for SIMPLE IRAs follow the same rules as Traditional IRAs with the exception of the two year rule. See same page 10 of PUB 560 for 2003 ( new last week ) referring to Pub 590 for SIMPLE IRA distribution rules.

JEVD

Making the complex understandable.

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  • 2 weeks later...

Even assuming all traditional IRAs and all SIMPLE-IRAs were distributed, I see nothing that would allow them to be aggregated for basis determination. I also, see no reason why you would want to aggregate them.

Perhaps a simple (theoretical) fact pattern would help me to understand what it is you are driving at.

Assume nondeductible traditional IRA contributions of $20 with a distribution of $5 from all traditional IRAs. The loss is $15 (subject to the 2% of AGI limit). Now add a SIMPLE with no basis. How would that change anything (excess SIMPLE IRA contributions aside)? If aggregated, wouldn't any gain in the SIMPLE reduce the loss?

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Gary,

Check the instructions to form 8606 and the form. As I see it, the balance in a SIMPLE IRA is included in the basis calculation as are SEP balances. I believe any increase in the value of the SIMPLE would have an effect on the basis %. In order to take advantage of a loss in the IRAs of the participant, all would IRA balances, including the SIMPLE IRA have to be distributed to determine the unrecovered amounts. I agree with Fishchick in the previous post.

JEVD

Making the complex understandable.

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Seems as though you are both correct regarding the operation of Form 8606. The form seems to be contrary to the its instructions regarding losses in a traditional IRA and losses in a SIMPLE IRA. The issue now is why? And whether the Simple would also have to be fully distributed to claim a loss in a traditional IRA? If so, why then isn't a Roth treated in the same manner? Something appears to be wrong (and it may be in the form). Why should the balance in a non-traditional IRA affect the gain/loss in traditional IRA(s) under Treas Reg 1.212? What now is the basis in the SIMPLE IRA? All thoughts appreciated.

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  • 4 weeks later...

It is my conclusion that ALL traditional IRAs (including SEP IRAs) and ALL SIMPLE IRAs would have to be fully distributed under Treasury Regulations Section 1.212-1 to claim an investment loss in a non-Roth IRA. Roth IRAs have separate basis recovery rules, but the method of computing a loss is the same. Thus, Form 8606 is correct AND the Publication 590 (for 2003, page 38) regarding loss recognition is poorly worded, especially in light of the definition of a traditional IRA on page 7 which states that a "traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA."

Thus, true statements can lead to absurd results.

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Gary,

I certainly appreciate the depth of your research and the detail of your explanations.

Thanks

You and the others straigtened me out; I thank you for your participation. --GSL

JEVD

Making the complex understandable.

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