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Old 05-28-2021, 07:40 AM   #121
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My former employer reversed course on me and told me to go pound sand and left the 1099 as is. So I went ahead and paid the taxes on it. I finally found an Enrolled Agent who would take my call and help me work though what to do now. As it turns out, because the 1099 was issued in 2020 I will not have to pay any penalties for excess contributions. So I have two choices:

1) Leave the money in my IRA and add it to my cost basis.
2) Withdraw the money from the account and put it in a taxable account.

If I leave the money in I would have to file an updated form 8606 to update my cost basis. I’m 18 years away from RMDs. If I remove the money from the account it will generate a second 1099, so I’ll have to figure out how to report it next year so that I don’t pay taxes on it twice.

My question is, is there any particular advantage to leaving it in at this point, since the gains on the money would grow tax deferred for another 18 years? Or is it better to pull the money out so I don’t have to track the basis?
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Old 05-28-2021, 07:45 AM   #122
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I don't think it makes any difference if the tax rate is the same. Let's say the amount involved is $100 and the tax rate is 20%.

If you leave it in and it triples in 18 years to $300 and you take it out you have $240.

If you take it out now and pay 20% and invest the $80 and it triples in 18 years then you have $240.

So I don't think it makes enough of a difference to fret about. What does you EA think you should do?
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Old 05-28-2021, 07:49 AM   #123
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I don't think it makes any difference if the tax rate is the same. Let's say the amount involved is $100 and the tax rate is 20%.

If you leave it in and it triples in 18 years to $300 and you take it out you have $240.

If you take it out now and pay 20% and invest the $80 and it triples in 18 years then you have $240.

So I don't think it makes enough of a difference to fret about. What does you EA think you should do?
He said pretty much the same. His biggest concern with leaving it in is that if I pass and the money goes to my heirs they will have no idea about the cost basis.

My concern with taking it out is it will generate a second 1099. He said there is a way to report it on next yearís taxes as basis so that Iím not paying the taxes on it twice but Iím not exactly sure what the mechanics are to do so. And if I enter a 1099 with a different distribution code than what is reported to the IRS, do I open myself up to a potential audit?
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Old 05-28-2021, 08:13 AM   #124
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He said pretty much the same. His biggest concern with leaving it in is that if I pass and the money goes to my heirs they will have no idea about the cost basis.

My concern with taking it out is it will generate a second 1099. He said there is a way to report it on next yearís taxes as basis so that Iím not paying the taxes on it twice but Iím not exactly sure what the mechanics are to do so. And if I enter a 1099 with a different distribution code than what is reported to the IRS, do I open myself up to a potential audit?
I would take it out and seek his advice on your report it on your 2021 return so you don't pay tax on it twice... even if you have to engage him to do your 2021 return or review the 2021 return that you have prepared.
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Old 05-28-2021, 04:54 PM   #125
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This is not your only traditional IRA, right? Correct me if I am wrong, but I think that since you already have other traditional IRA money, you cannot just withdraw this basis and all withdrawals will be prorated on how much is considered already taxed based on form 8606.
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Old 05-28-2021, 05:17 PM   #126
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This is not your only traditional IRA, right? Correct me if I am wrong, but I think that since you already have other traditional IRA money, you cannot just withdraw this basis and all withdrawals will be prorated on how much is considered already taxed based on form 8606.
Correct. I have another IRA with Vanguard. I called Fidelity today to review my options. They tell me I canít leave the money in the IRA and add it to my cost basis because itís an excess contribution, which contradicts what two Enrolled Agents told me. I didnít feel like thinking about it any more so I withdrew the money today. Fidelity tells me I will owe a 10% penalty on any gains over the past year but most of the money was sitting in a cash management account so there were hardly any gains.
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