Terpskins99

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Hi guys. I'm a 3rd year medical student that has about $30,000+ invested in regular mutual fund accounts (started investing around 1999). I don't work, so I don't have a regular income (outside of annual dividends I receive from my mutual funds and have them automatically re-invested). I am thinking of shifting most of my investments into an index fund.

A couple of questions...

1) If I cash everything out and end up with a net (+) $5,000 profit. After I pay the capital gains tax (assume 20%; not exactly sure what it is), can I consider that remaining + $4000 as income that can be used to contribute to a Roth IRA?

1a) If I immediately had all of the money re-invested into another mutual fund (all $30,000+), and never actually had any of it cashed out to my bank account. Is this still considered realizing a profit for tax purposes?

2) I also have about $3,000 in a pre-existing Roth IRA account (in a Janus mutual fund). If I shift that to another mutual fund (the index fund), is that considered a taxable event? And does that have any effect on my previously mentioned $4,000 contribution (since the max annual contribution is $5,000 as of 2008)?

3) Capital gains tax... for the first few years (1999-2003) I failed to report my capital gains off of distributions (I moved around a lot, forgot to update my address to the mutual funds and didn't receive the necessary 1099 forms).
For 2007, my 1099 DIV forms were... "2a Total capital gain distr: $438.80"
What is the best way to address the missed previous years?

Thanks!!!
 

Sol Rosenberg

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1a) If I immediately had all of the money re-invested into another mutual fund (all $30,000+), and never actually had any of it cashed out to my bank account. Is this still considered realizing a profit for tax purposes?

Yes.

2) I also have about $3,000 in a pre-existing Roth IRA account (in a Janus mutual fund). If I shift that to another mutual fund (the index fund), is that considered a taxable event? And does that have any effect on my previously mentioned $4,000 contribution (since the max annual contribution is $5,000 as of 2008)?

Not unless you make a non-qualified withdrawal/distribution from your Roth IRA.

3) Capital gains tax... for the first few years (1999-2003) I failed to report my capital gains off of distributions (I moved around a lot, forgot to update my address to the mutual funds and didn't receive the necessary 1099 forms).
For 2007, my 1099 DIV forms were... "2a Total capital gain distr: $438.80"
What is the best way to address the missed previous years?

Thanks!!!

I think, if you want to be 100% honest, you'll have to file 1040X forms for those years. Given that only < 2% of returns under 200k are audited by the IRS, you might just continue to be "ignorant" of your situation.
 

Terpskins99

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Thanks for the quick reply, Sol!

Any idea about the first part of the first question?

1) If I cash everything out and end up with a net (+) $5,000 profit. After I pay the capital gains tax (assume 20%; not exactly sure what it is), can I consider that remaining + $4000 as income that can be used to contribute to a Roth IRA?

My father was telling me he didn't think so since IRA's are technically only supposed to come from "work" (i.e. regular income).
 

Stroganoff

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I think, if you want to be 100% honest, you'll have to file 1040X forms for those years. Given that only < 2% of returns under 200k are audited by the IRS, you might just continue to be "ignorant" of your situation.
Dang, I got hosed then. One of my earlier undergrad years and I only made like $3k the whole year and still got audited in late 2006 for 2004 tax year. And the fockers charged back-interest. Sneaky. I only ended up paying like $300 to federal and <$50 to state, so it's better to live and learn with smaller incomes than in the future, I say. I had filed my 1040EZ for 2004 and thought it was done, but my mistake was forgetting to keep track of 1099 forms.

Thanks for the quick reply, Sol!

Any idea about the first part of the first question?

1) If I cash everything out and end up with a net (+) $5,000 profit. After I pay the capital gains tax (assume 20%; not exactly sure what it is), can I consider that remaining + $4000 as income that can be used to contribute to a Roth IRA?

My father was telling me he didn't think so since IRA's are technically only supposed to come from "work" (i.e. regular income).

Good question. Direct link to IRS Publication 590: http://www.irs.gov/publications/p590/ch01.html#d0e979

Look at "Table 1-1. Compensation for Purposes of an IRA"

What Is Compensation?

Generally, compensation is what you earn from working. For a summary of what compensation does and does not include, see Table 1-1. Compensation includes the items discussed next.

* Wages, salaries, etc.
* Commissions.
* Self-employment income.
* Self-employment loss.
* Alimony and separate maintenance.
* Nontaxable combat pay.

What Is Not Compensation?

Compensation does not include any of the following items.
* Earnings and profits from property, such as rental income, interest income, and dividend income.
* Pension or annuity income.
* Deferred compensation received (compensation payments postponed from a past year).
* Income from a partnership for which you do not provide services that are a material income-producing factor.
* Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs.


So I guess your father's right.
 
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