How can you prove your client has IRA basis (after-tax funds) when it hasn’t been reported to the IRS? If the IRA basis cannot be proved or reconstructed, then those after-tax IRA funds (the basis — which should come out tax-free), will be taxed when withdrawn, and this will result in a double tax on those assets. A recent case might provide some insight.

The U.S. Tax Court ruled that hardship distributions from a 401(k) and an IRA were taxable and subject to the 10% early distribution penalty. The court also allowed the IRA owner to claim a portion of his distribution as a tax-free return of basis, even though he had never reported his IRA basis to the IRS. (Gustavo E. Morles v. Commissioner, T.C. Summ. Op. 2015-13, Feb. 23, 2015)

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access