OK I have a friend who has a question. My friend is un employed, and has been for nearly a decade and as far as his income and assets are concerned for the past ten years - he is legally below the poverty level. I think he has just less than 5 thousand dollars to his name in a ROTH IRA. Friend is single and lives with another friend, has been single all his life.
Years ago, when friend's parent passed away, the mother left my friend a modest inheritance. It was under 100 thousand dollars which my friend was told by both the parents' probate attorney and a few CPA's, that the inheritance was not taxable and that there is no requirement to claim it as income. I think at that time - within the past ten years - one had to get an inheritance of over a half million I think in order for it to be taxable? Is that correct?
Anyway the year the first parent passed away, friend visited his parents financial adviser and the adviser advised to set up both a ROTH IRA and also a seperate brokerage account and deposit part of that inheritance money into both the ROTH and the seperate brokerage account. A year later the friends step father passed away and also left a small inheritance well below 100 thousand. So my friend also deposited a part of that inheritance money in the account. The year this second deposit occured, friend had ZERO wages, salary, tips etc and was un employed. The year the mother died, the friend had maybe 1,500 dollars in income and that was it. So starting from just prior to the actual date that both the ROTH and the seperate brokerage accounts were set up, up to today's date, he has had only about $2,500.00 in income. in Ten Years. Most of the years between the establishment of the accounts and present he had no income and filed no income tax returns - no W-2's nor any 1099's are on file with the IRS during that time other than the 2,500 bucks. I think only maybe two returns were filed in the past ten years - the two years my friend had a couple of short term jobs that lasted maybe a week or so.
So A few years later it was learned that the friend should not have put the money into the ROTH because at the time was un employed and had no income. He learned that one is not supposed to put money into a ROTH unless one makes above a certain level of income. So after finding out that the money should not have been put into the ROTH IRA he pulled several thousand dollars out of the account because friend found he was in error to put it in the ROTH and thougt he was doing the right thing. He got the figure he was supposed to take out of the ROTH, from the tax preparer, after bringing it to the tax preparer's attention and he withdrew it. This was partly an error on tax preparers account and partly also bad advice from the financial adviser - I will not mention their names here but they are huge national brands.
So anyway no W2's were filed by any company, nor any 1099 forms for self employment in the year he pulled the money out. Friend had only about 1500 bucks in income the year he put the money in, and was un employed the year he took the money out.
So some stock was sold. The stock was sold at a loss so there was no profit gained by the sale and distribution from either the ROTH account or the brokerage account.
My question is - if the money that went into both the ROTH account and the seperate brokerage account was solely from a non taxable source (inheritance), during years in which there were no wages, salaries, tips, cash income etc. and - if the money taken out resulted from the sale of securities which were sold at a loss, does the friend still owe an income tax return for the year in which friend had no income and no capital gains? Given that A - all the money deposited into both accounts were from non tax able inheritance and B - there were no capital gains (actally losses) from the withdraws? Also would there be any interest and or penalties involved?
Or...is it just enough to supply a trade ticket to the IRS showing that there were no capital gains profits gleaned from the sale of securities?
As of this date the non IRA brokerage account is closed and the ROTH still exists with just a few thousand dollars in it and no contributions to it nor any withdraws have been taken out of the ROTH for at least 6 years - since the distribution in question was done. It is just sitting there and actually there is less money in it now than there was several years ago.