I'm having difficulty with separating withdrawals for non-deductible traditional IRAs from withdrawals from withdrawals for 401K rollover IRAs. My non-deductible traditional IRAs were made after tax contributions, so they have a cost basis. My 401K rollover IRAs of course just get treated as ordinary income thus have no cost basis. I'm basically stuck on Form 8606; and I'm not clear how to complete it. The 'step by step' doesn't seem to ask the right questions; and the Form 8606 does not seem clear on this. I have balance at end of 2017 of roughly $66K in non-deductible traditional IRAs and balance at end of 2017 in 401K rollover IRAs of roughly $1,500,000. I've taken withdrawals from both in 2017.
There is no such thing as a nondeductible traditional IRA, only basis in nondeductible contributions that applies to all your traditional IRAs in aggregate, including your rollover IRA. Any distribution from a traditional IRA is a mix of nontaxable and taxable amounts in the ratio that your basis for 2017 has to the total of all of your IRA year-end balances plus any regular IRA distributions that you made in 2017. The rollover of the $1.5M to an IRA has caused nearly the entire amount of your IRA distributions made in 2017 to be taxable. TurboTax is calculating correctly that something like 4% to 5% of your traditional IRA distributions is a nontaxable distribution of basis with the remaining 95% to 96% of the distributions being taxable. Whatever amount of basis has not been distributed remains in your traditional IRAs (in aggregate).
I'm sure that this is not the answer that you were hoping to hear, but it is what is required under the tax code. Rolling a large 401(k) balance into a traditional IRA when you have significant basis in nondeductible traditional IRA contributions and would like to make distributions that are largely nontaxable is not an uncommon mistake for people to make.
Since the tax rate and distribution period is the same on both 401(k) withdrawals and on the taxable (i.e. non-Basis) component of IRA withdrawals, the net taxes would be identical whether or not the 401(k) balance had been transferred.
The only difference I see is that with 401(k)s you can defer taking the Required Minimum Distribution (RMD) withdrawals (and paying the associated taxes) beyond age 70 1/2 if you are not retired, whereas with IRAs the distributions must start at age 70 1/2 regardless of retirement. So if you have an IRA with a significant basis are not planning to retired until after age 70 1/2, it might make sense to not roll-over 401(k) funds into the IRA so you can minimize the taxes on the IRA RMD withdrawals while you are still working.
If I'm not understanding any of the above correctly, please explain. Thank you in advance.