We’ve all heard the slogan "What Happens in Vegas Stays in Vegas." When it comes to an IRA, the same rule — What Happens in Your IRA Stays in Your IRA — applies for income tax reporting.
It's the same with any employer or self-employed pension plan. Last tax season, as was the case several times during my long career, clients told me “I lost $50,000” or “I lost $200,000” in an IRA or 401(k). But other than sympathize with their plight there is nothing I can do about it on their 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, “beneficiaries” of the trust do not report the account activity on their individual federal or state income tax returns.
I don’t need to know if clients 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 do 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. I only need to know if they contributed to an IRA or if they took money out.
There is a way to get a tax benefit for losses in an IRA — but that’s a subject for another tip.
New Jersey tax pro Robert D. Flach has been preparing 1040s for individuals since 1972.