dmertz
Level 15

Retirement tax questions

CFR 1.408-11 describes the entire calculation:  https://www.law.cornell.edu/cfr/text/26/1.408-11

 

The calculation is performed over the investment performance of the entire IRA, not just the particular investment in which the contribution being returned was originally invested.  In the simplest case, if the entire IRA gained, say, 7% in value while the contribution being returned was in the account, the gains attributable to the contribution being returned is equal to 7% of the amount being returned.  For example, if you contributed $6,000 and the value of the entire IRA went up 7%, a return of the $6,000 is required to be accompanied by $420 of earnings for a total distribution of $6,420 from the IRA.  That $6,420 can come from any of the investments in this IRA account.

 

Fidelity will do the earnings calculation for you based on the IRA value on the date of the distribution of the return of contribution and earnings.  You'll just need to tell Fidelity from which investments to make the distribution.

 

The earnings distributed ($420 in the example above) will be subject to income tax and, if you are under age 59½, to a 10% early-distribution penalty.