Government interest in IRA withdrawals

[NECPA in NEBRASKA]

I hope that I have not been messing up for years, but do you go through all of the IRA withdrawal 1099-Rs and look for US govt interest and pull it off of the state returns? I don't see anyplace on the input form to split it out and I can't find anything in the state directions that refers to it at all. The client is sure that I need to go through and figure it out. Please be gentle if I'm wrong, because I am at the end of my rope this year. Thank you.

[jainen]

>> look for US govt interest <<

Some people say treasuries and muni bonds are not a smart choice for an IRA, since you get the lower yield without any corresponding tax advantage. Distributions from an IRA are fully taxable as ordinary income, even if the IRA's growth was due to what would otherwise be tax advantaged investments.

[NECPA in NEBRASKA]

Thanks so much! I thought that was correct, but they had me convinced that I was wrong.

[jainen]

>>they had me convinced <<

If you have a problem explaining it, remind him that we don't get capital gains rates within an IRA either. But his argument is interesting. It doesn't sound to me like the sort of thing a taxpayer would think of on his own. Try to find out where he got the idea from, and whether he based his original investments on it or is just applying it now because it's time to withdraw.

[NECPA in NEBRASKA]

Excellent point on the capital gains rates. He read the brochure that the investment company sends out with the 1099s and thought that the treasury interest portion of his mutual fund shouldn't be subject to state tax. I really appreciate you taking to the time to respond. I learn a lot just reading your responses.