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tax basis: IRA distributions in kind

Jeanne

I've discovered an anomaly. It's likely not Quicken's fault (or not entirely) because I'm getting different behavior in Fidelity and Merrill Lynch accounts (my only experience). I would despair of finding someone at Merrill to talk to--not least because this is probably a relatively uncommon situation. (2020 was an uncommon year.) But I figure the least I can do is post the information.

The situation: If you withdraw securities (rather than cash) from an IRA, your tax basis is adjusted from your original cost to the current market value. But what Quicken displays is different. In the case of Fidelity, the original cost basis is transferred out of retirement (harmless as far as I can imagine right now), and the correct new cost basis is transferred into brokerage. In the case of Merrill Lynch, the old cost basis is recorded on both sides of the transaction.

Honestly, I thought I was losing my mind, looking at reports that aggregate all investments and thinking tax basis was one thing and then, repeatedly, finding it different. Clearly, some transactions need to be adjusted.

To round out the picture: In both cases, the transfers were correct on the statement in the relevant month. Fidelity's 1099 reconciled, and later statements and online balances omit any cost basis, which is fine by me. Merrill's 1099, cost basis on later statements, and online balances are very close to what my records show. (I think I know a reason for the small discrepancies but it's not worth going into. In any case, they did not merit my objecting to the 1099.) But Quicken ends up with a much different story at Merrill Lynch (much bigger discrepancies).

I'd welcome any discussion. And if I should send this elsewhere, please just advise.

Also, if you've read this far, thanks for your interest,
Jeanne

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Jim_Harman

Were the distributions really in kind, i.e. the securities were transferred directly from one account to the other?

And was it a distribution to a taxable account, or was it a rollover to another IRA or a conversion from a traditional IRA to a Roth?

It is much more common in a IRA distribution to a taxable account be done in cash. But if this was indeed an in-kind distribution to a taxable account, I would think that the cost basis in the receiving account should be the market value as of the distribution date and not the original cost basis of the securities transferred. This will be important when you eventually sell the transferred securities.

Quicken's normal Shares Transferred Between Accounts action preserves the original cost basis, which I think is not what you would want in the case of a distribution.

If it was a rollover or Roth conversion, the cost basis is less important because it does not affect the taxes you will eventually pay. The taxes you pay on a Roth conversion are based on the value at the time of the conversion.

Disclaimer: I am not a tax professional. You should consult your tax advisor.

q_lurker

Opening caveat: I am not a tax pro in any fashion. Only a nameless, faceless, guy with a keyboard. Don't take any of this to court.

IMO, there is no such thing as an 'in-kind' distribution from an IRA. The MF families may offer that as a
service for easy thought-processing, but in my book it is always a sell from the IRA and a buy in the taxable account. Since it is a same-day transaction, for a MF, it is a wash. You are selling and buying at the same price. For a stock, there could be a price difference since the price varies constantly and the brokerage may treat that as a wash to keep their client happy. But I believe in the receiving account, the securities have to be treated as acquired on that date for the fair market value on that date.

If all that has any truth in it, then it should be treated that way in Quicken -- sell in IRA, transfer cash out, buy in taxable account. Using the Shares Transferred in Quicken would not be appropriate, since that function maintains the original cost basis and acquisition dates.

Perhaps someone more confident on the tax-realities can comment with more authority.

Jeanne

To clarify: I didn't really expect a solution here. I just wanted to share info and, well, get some reassurance that I was not missing something blindingly obvious.

In addition, I don't need tax experts (for this) because I know to the penny what the basis is in the eyes of the IRS, and it conforms with what was on the 1099 and in the statements at the time of the transfer, as I said in my original post.

Lastly, in the IRS lit., I only see in-kind distributions discussed in connection with plan termination or withdrawal from a plan, tho I haven't dug very deep. But if you google it, you'll find lots of discussion of discretionary/elective in-kind distributions from retirement accounts. (The decision tree is complicated.) Fidelity's statement at the time lists it as "RMD Distribution" (redundant, I know), while "Normal Distribution" is used in the Merrill statement.

Sooooo... as to Quicken, our main interest here... Yes, it is a distribution from an IRA to a taxable brokerage account.

I wouldn't be certain that the two companies process this in the same manner, and there is reason to think that some manual adjustment goes on but I can't testify to that. But yes, for what it's worth, Quicken shows "shares removed" and "shares added" in each instance (not purchases and sales), with correct final values at Fidelity and wrong final values at Merrill.

I don't see a "Shares Transferred Between Accounts" action in Quicken here. "Shares Sold and Funds Transferred" is the closest verbiage. Substantively, I think the combined "shares added" + "shares removed" actions that were used bring you the closest.

Anyway, I do appreciate the dialog for the reason stated at the top of this post. I hope I've clarified.

Jeanne

Jim_Harman

You are using the Windows version of Quicken, right?

If you go the the IRA account and click on the Enter Transactions button, one of the choices near the bottom of the list should be Shares Transferred between accounts. But I think we agree that is not what you want to use for a transfer to a taxable account, because that preserves the original cost basis.

As @q_lurker recommends, I think the cleanest combination from a tax tracking point of view would be a Sold in the IRA with the proceeds going to the taxable account, plus a Bought in the taxable account for the same number of shares.

q_lurker

But yes, for what it's worth, Quicken shows "shares removed" and "shares added" in each instance (not purchases and sales), with correct final values at Fidelity and wrong final values at Merrill.

Unless you are doing some manual intervention, Quicken is showing what Fidelity and Merrill are sending. That is their choice and may or may not be correct or complete for you and your Quicken choices. In particular, they may or may not send all the 'correct' information for the Add Shares side. They may or may not include the correct cost and acquisition dates. You can certainly edit the Add Shares transactions to provide that correct information.

The other point: by using only Remove Shares / Add Shares, I do not believe Quicken will be able to estimate your taxable income (tax planner and tax schedule type of information). It is the cash out withdrawal from the IRA that usually triggers that information. That does not appear to be an important aspect to you, but may be to others.

I wouldn't be certain that the two companies process this in the same manner, ...

Is there some reason to believe they have options on how to process differently? Are their processes as presented on their sites and documentation consistent with what they are sending to Quicken for you?

Mark1104

this is where it gets confusing whether Quicken is a simply financial tool or is adept at the more complex rules of federal tax implications; I go with the former and not the latter.

The whole conversation of "cost basis" is confusing as from a financial standpoint it is certainly the price paid for the assets in question, but from a tax standpoint - for most folks - the 'TAX cost basis' is ZERO within the TRAD IRA.

When an in-kind transfer occurs, meaning that shares are moved FROM a TRAD IRA to either a ROTH or non-qualified account, the "cost basis" of the shares doesn't change but the 'TAX cost basis' changes from ZERO to the market value on the day of the transfer, and any taxes owed are based on that valuation. Transfers from one TRAD IRA to another TRAD IRA shouldn't impact the TAX cost basis.

Personally, I use Quicken as a financial tool only and leave the tax implications of my transfers to my brokerage firm and Turbo Tax to figure out and report,

NotACPA

Cost Basis IS IMPORTANT in a retirement type account. Without it, how would you calculate the performance of the account and any securities therein?

Mark1104

note I didn't state it was unimportant, what I stated is that 'cost basis' and 'TAX cost basis' are two very different measurement points within a TRAD IRA. Yes, 'cost basis' is the basis of performance calculations, but it's NOT the basis of tax transactions.

the point is deciding whether you are using Quicken to track financial performance or tax performance. I use it to track the former and let my broker and Turbo Tax track the latter.

Sherlock

I have performed such "IRA distributions in kind" and Quicken does not handle the transfer as shares appropriately. The approach I used was to enter a Sold and WithdrawX in the IRA account and BoughtX in the brokerage account to maintain the correct 1099 distribution and cost basis.

Jeanne

>>[Jim_Harman] click on the Enter Transactions button, one of the choices near the bottom of the list should be Shares Transferred between accounts.<<
>>[Sherlock] Quicken does not handle the transfer as shares appropriately. The approach I used was to enter <<

Aha! I've only needed to use the drop-down list in the ACTION column. Jim, you are correct that there are more actions than the ACTION column suggests. Having made my adjustments for now, and being really seriously tired of this, I'll have to just remember both your post and Sherlock's when I need/wish to explore possibilities further.

>>[q_lurker] Unless you are doing some manual intervention, Quicken is showing what Fidelity and Merrill are sending.<<

That's my original post. I just thought that if someone was looking at a report with cost basis, in this admittedly uncommon situation, s/he might not know that the number might not be what is expected. Or, in this doubly odd situation (two custodians), different lines on the same report might be telling a completely different story because there's just no telling what each of two custodians is reporting. That seemed worth posting.

>>[q_lurker] Is there some reason to believe they have options on how to process differently?<<

They have to come out with the same result, which they do in their statements and 1099s. How they feed info to Quicken or what happens when Quicken accesses data is quite another matter and probably not on the top of anybody's systems-development priority list. Double that for uncommon situations. I worked in the industry and I know that there are many manual interventions when the systems haven't kept up with every possible variation in an astonishingly complicated field. And the need for such and the choices made are likely to vary from custodian to custodian. I thought I saw evidence of manual entries here, but I cannot testify to that. It's really a minor point.

>>[Mark1104] 'TAX cost basis' changes from ZERO to the market value <<

Well it changes from original cost assuming you can document it (assuming you are asked). But sure, the IRS starts at zero and the burden is on you.

>>[Mark1104] Personally, I use Quicken as a financial tool only and leave the tax implications of my transfers to my brokerage firm and Turbo Tax to figure out and report<<
>>[NotACPA] Cost Basis IS IMPORTANT in a retirement type account. Without it, how would you calculate the performance of the account and any securities therein?<<

But thanks to both of you for this. I've been agonizing about holding on to the history, but hesitated to go change what was there. Knowing I am not alone, I've change four of these entries and I'm much happier today. I don't have experience with tax software but, from everything I've read, tweaks are not rare. And, of course, one would ALWAYS check any output against the 1099, eh?

AND BY THE WAY... to return to Quicken reports: I went through many today and they all pick up the same cost as is entered in the "shares added" entry and accepted my changed number--except one. The Investment Performance report appears to dutifully compute the market value on the added & removed dates (clever). If I set this report to "earliest to date" it is also true that cost is find-able from the original purchase info, assuming you entered it. But I'd like (most of) my reports to tell me original cost without a lot of digging and without my needing to remember where I need to dig.

It's been edifying, so thanks to all,
Jeanne