I think the Roth IRA is a fabulous idea, and I converted my IRA when I could spread the tax over four years. It occurred to me that the only damper is that tax-free withdrawals from the Roth will be counted in the AMT alternative minimum tax calculation. Is that so, or is there an escape hatch?
-- John F. Briganti
Uncle Sam is greedy, but he's not a monster.
Assuming you wait until you're 59 1/2 and the account has been open for at least five years, your Roth IRA distributions will be tax and penalty free. So they will not be included in your adjusted gross income, says Martin Nissenbaum, national director of personal income tax planning at
Ernst & Young
. Your adjusted gross income is used to calculate your alternative minimum taxable income. (The AMT was created to ensure that high-income individuals don't wipe out their tax bill with deductions, credits or exemptions. Since it isn't indexed for inflation, it's now affecting a broader segment of the population.)
There are many items known as preference items that are considered deductions and credits under the "normal tax system" that are not allowed under the AMT system. For instance, while you are allowed to deduct real estate taxes on your
-- Itemized Deductions
-- under the normal system, you are not allowed to do so under the AMT system. (Check out this previous
Tax Forum for more on these preference items.)
You'll be happy to know that your Roth IRA distributions are not AMT preference items. So you're free and clear.
If you make an early withdrawal from your Roth, you will owe ordinary income tax on any earnings. That distribution then will be included in your adjusted gross income and indirectly will play a role in your AMT eligibility.
Just another reason to wait until age 59 1/2 to get your hands on that money.
Managed Account Fees
If I have a managed account and I pay 90 basis points to an investment manager, can my fee be deductible as an investment expense? I realize that commissions are added to the basis, but how do I treat the fees? -- Dan Grant
If you are an investor, the fees you pay to have your account managed or for investment advice are deductible as an investment expense, assuming they exceed 2% of your adjusted gross income. Report them on line 22 of Schedule A.
But if you qualify as a
trader for tax purposes and you pay management fees, the
Internal Revenue Service
may question if you're trading for yourself or if someone else is doing the work for you.
To be a trader, you must make it clear that you are the one making the trading decisions, says Ted Tesser, trader tax specialist and author of
The Trader's Tax Solution.
"So we put in all our clients' agreements that 'the client still reserves the right of final discretion' on the account and then take it as a trading expense on
-- Profit or Loss from Business
," says Tesser.
Big note: Mutual fund expenses are not deductible since they reduce the fund's total return, reminds Rande Spiegelman, a senior manager in
investment advisory-services group in San Francisco.
I Have UMG in My IRA
If UMG stock (MediaOne) was in an IRA and the cash option is selected, no tax would occur until withdrawal from an IRA. Is this true? Patricia L. Bottorff
That's very true. Any cash received in your IRA will not be taxable to you until you start taking distributions from your account.
(NYSE:UMG) back in June, so MediaOne shareholders were given three different options for the upcoming distribution of AT&T stock. The options were all cash or two different combinations of cash and stock. The decision had to be made by Friday, July 14. (For more details on the options, check out this recent
Regardless of the option elected, any cash received would not be taxable, assuming you left the money in the account until at least age 59 1/2. At that point, you could start taking distributions from your IRA and would owe ordinary income tax on the amount received.
But with the shares in your IRA, the all-cash offer looks even more appealing. "You don't have to worry about taxes and holding periods," says Janice Johnson, a partner at
American Express Tax & Business Services
in New York.
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TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.
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