Tuesday, June 16, 2009


While it has taken years, I have finally trained many of my clients to provide me with both the purchase and sale “confirms” of investments they have sold during the year. Unfortunately, others just give me the purchase and sale confirms they actually received during the calendar year – as if I magically know the cost of any stock sold. At least it is something, and I keep the purchase confirms in their “file” so I will have them in the future when the investment is sold.

Several clients also give me the purchase and sale confirms for investments bought and sold within their IRA account. I always return these with the note – “don’t need”.

During times of market distress, like our current situation, I will also be told, “I lost $20,000 in my IRA last year” – as if I can deduct this loss on their current 1040.

I must tell my clients that I do not need to know if they bought or sold investments in their IRA, what they earned in interest and dividends in the IRA, or whether or not the account lost or made money. While I very much want to know the specific details of what has happened in “normal” brokerage or mutual fund accounts, I do not care what has happened in IRA accounts.

Truly, just like Vegas, for income tax reporting purposes – what happens in an IRA stays in the IRA!

It is the same with 401(k)s, 403(b)s, 457s, SEPs, SIMPLEs, and any other employer or self-employed pension plan. This past tax season, as was the case at several times in the past during my long career, clients told me “I lost $50,000” or “I lost $200,000” in their 401(k). But other than sympathize with their plight there is absolutely nothing I can do about it on their 1040.

The only thing I want to know with any of these accounts is if you received a distribution did you “take the money and run” or did you “rollover” the money into another IRA or retirement account.

If you “took the money and ran” from a traditional IRA account I may want to know the balance in all your traditional IRA accounts on December 31st. This is needed if there is a “tax basis” (resulting from non-deductible contributions). In the case of NJ state income taxes all traditional IRAs have a “tax basis”, as contributions to a traditional IRA are not deductible on the NJ-1040.

An IRA, or any retirement account, is a separate legal entity. It is a tax exempt trust. While the activity of the account may need to be reported to the IRS or others by the trustee (i.e. Form 5500), “beneficiaries” of the trust do not report internal retirement account activity on their individual federal or state income tax returns.

I must point out that there is a way to get a tax benefit for losses in an IRA – but only if you withdraw all the monies in all your IRA accounts in one year and the total amount of what you get out is less than what you put in over the years. But that is the subject for another post.



John said...

In the last paragraph, shouldn't "more" be "less"?

You get a loss if the withdrawals from a closed IRA total less than the contributions?

Robert D Flach said...



Good catch!

Indeed - if your withdrawal of IRA total balance is less than total contributions (what you put it) you would get the loss.

Thanks for pointing that out.