Retirement tax questions

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@DFH wrote:

 

I “rolled over” funds from a tax-advantaged company retirement plan to what I thought is properly called a Traditional IRA.  These funds were a mixture of before- and after-tax contributions.

 

My questions about this are 1) do IRS rules allow withdrawal of only deductible part of an IRA if the funds don’t go to a QCD, and 2) if not, does TurboTax correctly prorate the components of the aggregate withdrawal and update the basis remaining.  I think the answer to 1) is No, and to 2) is Yes.

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#1  No.  You can NEVER withdraw ONLY the nondeductible part - it must be prorated over the entire value of ALL Traditional IRA accounts which include SEP and SIMPLE IRA's. (For tax purposes you only have ONE Traditional IRA which can be split between as many different accounts as you want, but for tax purposes they are all added together).

For example using rough figures: if you had $60K of nondeductible contributions in an IRA with a total value of $600K (10:1 ratio), then when you take a $60K distribution from any IRA account $6,000 would be nontaxable and $54,000 would be taxable (same 10:1 ratio) , with the remaining $54K of basis staying in the IRA for future distributions. As long as there is any money in the IRA, there will be some basis.

TurboTax will ask for your non-deductible "basis" and then the *Total Value* of *all* Traditional IRA, SEP and SIMPLE accounts as of Dec 31, of the tax year. That is so the prorating of the basis can be properly proportioned between the current years distribution and the remaining IRA value. That is done on the 8606 form.

#2 Yes.   That is done on lines 6-15 on a 8606.

Also note that if you rolled a 401(k) into a Traditional IRA that had after-tax basis then you must manually enter that when the 1099-R interview asks for prior years after-tax basis.    That will only happen if you are entering a 1099-R that has the IRA/SEP/SIMPLE box checked and a code 1, 2, or 7 on box 7 and there is a taxable amount that will go on the 1040 line 4b.  If the distribution is not subject to tax then the question is not asked and no 8606 is produced.