ira-cd accrued interest taxed twice

I wrote a unique problem regarding the accrued interest being taxed twice on 8-09 and 8-12. So far I have not received an acceptable answer. Is there someone knowledgeable enough to be able to give me a second opinion. This is something big and involves many accounts. I was hoping that Ed’s staff has come across this problem.
This is a real problem that has been overlooked . I really would appreciate some help.



I agree with Alan’s answer dated August 9th. You’re just paying tax sooner because counting the accrued interest in the year end balance increases your required minimum distribution. You’re taxed only on the actual dollars that you take out of the plan. Each of those dollars exits the IRA only once.



You should not be reporting any interest or other gains inside your IRA, If the bank is issuing improper 1099-Rs, have the correct them. The only tax you should be paying is on the taxable portion of any distributions.



[quote=”[email protected]“]You should not be reporting any interest or other gains inside your IRA, If the bank is issuing improper 1099-Rs, have the correct them. The only tax you should be paying is on the taxable portion of any distributions.[/quote]

You are close but not quite correct. Like I said before this is somewhat complicated. What the bank does is to tell the IRS that I have interest accrued on 12-31. This is accrued but not posted. Now the following year they show the posted interest for the complete year which includes the accrued interest already reported to the IRS. Now my fair market value is increased by that year interest amount. The problem is that the bank reports the accrued interest to the IRS on 12-31. They do not have to report the interest as accrued on 12-31 unless they start interest reporting on 1-1 the following year. Then I would only be paying tax on the actual amount that I receive. I recently reviewed this problem with the PA state examiner and he agrees with me. Now I’m waiting for the PA state banking commission to take action. Personally it looks like there is some sort of cover-up. I also contacted the University of Pittsburgh economics dept and reviewed this with a professor that teaches banking and he agreed with me with a stipulation that there is no rule allowing the bank to do so. The OCC says you are correct, but then there is no rule saying that the bank cannot do so. It is ludicrous. In other words if no one tells the bank that they cannot do this then it is okay to do so at the customer’s expense. Like I said this is something big and obviously overlooked by many people as most people will not or are incapable to correctly check their accounts.

Without looking at the complete picture it is impossible to detect this problem. One bank admits that it is nost correct, but will not change it. That is because they would need to change the complete computer program. The existing computer program is correct for a plain CD, but not for an IRA-CD.

I desperately need some help by knowledgeable and dedicated people.
someone has to look at the complete picture. I myself did not recognize this error as I believed that the bank was correct until I calculated the amounta myself.

This is not a wild guess. I guarantee you that this is a valid complaint. Hopefully mopre people will bacome aware of this and force the FDIC and the OCC to take action.



If you are referring to the 5498 used to report year end IRA values, and IF the accrued value of the CD is brought current as of 12/31 by the addition to 9,000 to the year end value and that number determines your RMD based balance, can you check and determine the dollar amount of the difference from one year to the next – it should be 12,000.

As was stated before, if the added FMV of the accrued interest as of 12/31 determines your RMD and it adds 9,000 to the FMV, your RMD is not increased by 9,000, but rather by 9,000 divided by the RMD divisor. For example, if you are in your early 70s, and your RMD is around 5%, then 5% of the added 9,000 means that your RMD is increased by $450 and you are taxed on $450 more. You are not taxed on 9,000 more income each year because of this, only 450 more.

If the CD were in a taxable account and the CD term was more than one year, accrued interest would be sent to the IRS on a 1099INT. The bank appears to be treating this in a similar fashion, only reporting the increased value on a 5498 rather than a 1099 INT. I am not aware of any regulation that clarifies if this is correct or not, but it does show consistency with what would happen in a taxable account.

As stated previously, it appears that the affect on your RMD is the same as if you had a series of 3 months CDs and the 12/31 FMV included the interest to date.

But I do not know exactly what the bank is reporting in relative numbers. IF they simply report the value as accrued on 12/31, the net result is what I stated before, ie it accelerates your RMD somewhat compared to a CD with a term less than one year,

Exactly what is the term of this CD, and what is different vrs what this post indicates?



I am hoping that by posting a link to a 5498 and what the information in each box is reporting you will gain some insight into what people have been trying to explain to you. If not then maybe at least someone else will benefit from having the parts of a 5498 broken down for them.

Here is a link to the 2008 5498 directly from the IRS website: [url=http://www.irs.gov/pub/irs-pdf/f5498.pdf%5D2008 5498[/url]

You want to look specifically at Copy B, as this is what your 5498 should look like.

Box 1. Shows traditional IRA contributions for 2008 you made in 2008 and through April 15, 2009. These contributions may be deductible on your Form 1040 or 1040A. However, if you or your spouse was an active participant in anemployer’s pension plan, these contributions may not be deductible. This box does not include amounts in boxes 2–4 and 8–10.

Box 2. Shows any rollover, including a direct rollover to a traditional IRA or Roth IRA, or a qualified rollover contribution to a Roth IRA, you made in 2008. It does not show any amounts you converted from your traditional IRA, SEP IRA, or SIMPLE IRA to a Roth IRA. They are shown in box 3. See the Form 1040 or 1040A instructions for information on how to report rollovers. If you have ever made any nondeductible contributions to your traditional IRA or SEP IRA and you did not roll over the total distribution, use Form 8606, Nondeductible IRAs, to figure the taxable amount. If property was rolled over, see Pub. 590. For a qualified rollover to a Roth IRA, also see Pub. 590.

Box 3. Shows the amount converted from a traditional IRA, SEP IRA, or SIMPLE IRA to a Roth IRA in 2008. Use Form 8606 to figure the taxable amount.

Box 4. Shows amounts recharacterized from transferring any part of the contribution (plus earnings) from one type of IRA to another. See Pub. 590.

[b]Box 5. Shows the fair market value of all investments in your account at year end. However, if a decedent’s name is shown, the amount reported may be the FMV on the date of death. If the FMV shown is zero for a decedent, the executoror administrator of the estate may request a date-of-death value from the financial institution.[/b]

Box 6. For endowment contracts only, shows the amount allocable to the cost of life insurance. Subtract this amount from your allowable IRA contribution included in box 1 to compute your IRA deduction

Box 7. May show the kind of IRA reported on this Form 5498.

Box 8. Shows SEP contributions made in 2008, including contributions made in 2008 for 2007, but not including contributions made in 2009 for 2008. If made by your employer, do not deduct on your income tax return. If you made the contributions as a self-employed person (or partner), they may be deductible.See Pub. 560

Box 9. Shows SIMPLE contributions made in 2008. If made by your employer, do not deduct on your income tax return. If you made the contributions as a self-employed person (or partner), they may be deductible. See Pub. 560.

Box 10. Shows Roth IRA contributions you made in 2008 and through April 15,2009. Do not deduct on your income tax return.

Box 11. If the box is checked, you must take a required minimum distribution (RMD) for 2009. An RMD may be required even if the box is not checked. The amount, or offer to compute the amount, and date of the RMD will be furnished to you by January 31 either on Form 5498 (in the blank box to the left of box 10) or in a separate statement. If you do not take the RMD for 2009, you are subject to a 50% excise tax on the amount not distributed. See Pub. 590 for details.



You should be able to see on the form 5498 posted and by reading the description of each box that there is nowhere on the form where accrued interest is reported to the IRS. Whether you have a traditional IRA or a Roth IRA you do not report to the IRS the amount of any accumulated interest in your account, and neither should your financial institution.

If we are discussing Fair Market Value, again, you do not include this dollar amount on any tax reporting forms and this figure only comes into play when calculating your mandatory distribution amount. Furthermore the Fair Market Value and RMD amount must be furnished to the IRS by your financial institution by early February. In 2009 the deadline is February 2nd.

By definition the Fair Market Value is the dollar value of your IRA plan as of year end. This may include accrued interst that has not posted to the account only up to year end or it may include only interest that has posted to the account. Which option your financial institution chooses is determined by their accounting methods. Once again, regardless of how the Fair Market Value is determined you should not be reporting and paying taxes on the interest accumulated on your IRA account.



Have been reading the comments and answers. Now, eight years later, I’m faced with the same issue, and can’t get my hands around it. Brokerage reported $12,0000 of accrued interest emanating from a number of corporate bonds. That amount has been added to the FMV of my IRA holdings at 12/31/16. Let’s use the same example that Alan did. If I’m required to take RMD of 5%, then that comes to $600. Assuming my tax bracket is 25%, means I pay another $150 in Federal Income Tax. Here’s my issue: In 2017, the $12,000 of “accrued interest” actually gets paid out into my IRA account. That will increase the FMV value of the IRA at 12/31/17…creating what appears to be an amount subject to double taxation. What am I missing? Thanks.



  • Well, back to this one!  One aspect that was not discussed previously was exactly how the year end IRA value attributed to a specific bond was determined. Can you look at your year end statement for a specific bond you purchased that still has accrued interest and determine the stated year end value for 5498 purposes?
  • Here is an example. Say you purchased a bond in October for 10,000 and it has accrued interest of 500 so 10,500 was deducted from your IRA to make the purchase. Disregarding the fact that this bond has probably dropped in value since purchase which makes this harder to test, assuming that there was no market value change, what does the statement show for the value of that bond? If it shows 10,000 plus the 500 increase for accrued interest, isn’t the 500 increase offset by the extra 500 that was pulled from your IRA cash value to pay the accrued interest to the seller when you bought the bond? If so, your 5498 value is not actually resulting in accelerating your RMD amount. In other words, your bond may show up as 500 more than what it is worth or has yet to be paid to you but your cash balance is down by an offsetting 500.
  • In your case, in 2017 the 12,000 in accrued interest that you paid to the seller is paid back to you so these bonds have now been normalized and accrued interest will no longer be a factor going forward. Yes, your 2017 year end 5498 will be up by 12,000, but that money is actually in your account.


That’s a very clear explanation, and illustration. In an IRA, you’re only interested in FMV at year end, for RMD calculation. I can see where the payment for the bond decreased the amount of my IRA by the amount of the accrued interest that I had to pay. And in “accounting terms”, since the “debit” equalled the “credit”, there is no net change. In 2017 when actual interest is paid, then the IRA balance goes up accordingly and rightfully so. Hence, it’s not double taxation. Thanks so much.



Thanks for verifying this. We never did get this resolved 8 years ago, so good to get it done now.



I never thought I would see this thread again!



Add new comment

Log in or register to post comments