Paying tax on Required Minimum Distribution? E.g. distribution is $10,000 and I've paid tax on $12,000 w/ 8606. Can I choose to not pay tax by using part of the $12,000?

[Need8601]

How to pay tax on Required Minimum Distribution, exactly? E.g. distribution is $10,000 and I've paid tax on $12,000 using form 8606 over the years.  I've read all the RMD Q&A but do not see a clear-cut answer to this example. Can I choose to not pay tax using part of the said $12,000?  If not, what is the formula to pay tax?

[dmertz · Accepted solution]

Since you mention Form 8606, presumably the distribution was from a traditional IRA.  Since you mention that the distribution was an RMD, presumably you still had money in traditional IRAs at the end of 2017.

Only a fraction of your RMD is nontaxable as a result of having $12,000 of basis in nondeductible traditional IRA contributions.  The portion that is nontaxable is calculated on Form 8606.  TurboTax automatically calculates the taxable and nontaxable portions of your distribution after you enter the Form 1099-R reporting the distribution, click the Continue button on the Your 1099-R Entries page, enter or confirm your $12,000 of basis, and enter your December 31, 2017 total balance in traditional IRAs.

For example, if your 2017 year-end balance was $190,000 and your distribution in 2017 was $10,000, your $12,000 of basis represents 6% of the $200,000 sum of your year-end balance and distribution.  This means that your $10,000 distribution was 6% nontaxable and 94% taxable.  Form 1040 line 15a of Form 1040A line 11a will include the entire $10,000 but line 15b or 11b will include only $9,400.  The basis remaining in your IRAs will be $11,400.  Your IRAs will always be part basis until all of your IRAs are entirely depleted.

See IRS Pub 590-B for more details:  https://www.irs.gov/publications/p590b#en_US_2016_publink1000230812

[Need8601]

@dmertz Thank you so much for your time and expertise!  You have made it clear and easy-to-understand with your example and your comments.

[Need8601]

@dmertz I have a question about using 2017 year-end balance to calculate the tax.  Why not using the Traditional IRA and 401(k) balance on the day the brokerage firm takes the distribution amount from the  balance?  A brokerage customer in 2017 had the RMD the first time so he asked his brokerage firm to do RMD distribution in early 2017 (15Feb2017).  The brokerage said they applied an IRS formula to calculate the distribution based on the balance on 15Feb2017, which would be very different than the year-end balance.  I have difficulties reading and understanding the IRS web link you provided.  Thank you.

[dmertz]

The taxable amounts of distributions from a 401(k) and from a traditional IRA are required to be calculated independently.  Unlike a 401(k) where the plan administrator has all of the information necessary to calculate and report the taxable amount of a distribution on the date of the distribution, without an audit the IRS has no way of knowing when particular transactions in your IRAs occurred.  The regulations therefore require that the taxable amount of a traditional IRA distribution be calculated as if the distribution occurred on December 31 of the distribution year, taking into account the traditional IRA balances on that date.

[Need8601]

@dmertz Thank you for your answer containing useful information on 401(k) and traditional IRA.  I am still not clear about the dates used for the calculation of taxable amount regarding Traditional IRA.  In the case of distribution occurring on 15Feb2017 on Traditional IRA, I think the brokerage used the traditional IRA balance of 12/31/2016 to calculate the distribution amount according to IRS "Required Minimum Distribution Worksheet".  However to calculate taxable amount for 2017 tax return I apply the balance of 12/31/2017 when using your method above which had an example of $190,000 2017 year-end balance?  12/31/2016 balance and 12/31/2017 balance can be very different while both balances are for the same distribution.

[dmertz]

Correct.

If you rolled your 401(k) over to a traditional IRA in 2017, doing so has decreased the amount of your basis in nondeductible traditional IRA contributions that can be applied to the traditional IRA distribution and has increased the taxable amount of that distribution, even though the rollover might have actually occurred after the traditional IRA distribution.  The unused portion of your basis remains in your traditional IRAs to be applied to later distributions.  Your traditional IRAs will always retain some basis until your year end balance in traditional IRAs is zero.

[Need8601]

@dmertz I had two 401(k) accounts A and B from two companies and no IRA account on 1/1/2017.  Later in February the RMD distributions occurred on both 401(k) accounts.  Then 401(k) B rolled  over to a traditional IRA in May.  To use your method above which had an example of $190,000 2017 year-end balance, do I use 12/31/2017 balance of 401(k) A, and use 12/31/2017 balance of traditional IRA (which came from 401(k) B rollover)?  

And are there any other things I need to know to correctly report tax?  

I thought my basis in nondeductible traditional IRA contributions should not change after the above rollover.  I thought the total of such contributions should still be a simple mathematical addition, i.e. adding up the amount in each past year's 8606 forms.  is this not correct?  Thank you.

[dmertz]

Include only amounts that were in IRAs on 12/31/2017, not amounts that were in 401(k)s on 12/31/2017.  401(k) A's 12/31/2017 balance would *not* be included on Form 8606.  A 401(k) is not an IRA.

Your basis in nondeductible traditional IRA contributions did not change as a result of the rollover for 401(k) B.  What changed as a result of the rollover is the amount of that basis that can be applied to your IRA distributions or Roth conversions from traditional IRAs in 2017.  The increase in your IRA year-end balance due to the rollover from 401(k) B decreases the proportion of your IRAs that is basis, and distributions are nontaxable in proportion to the basis in your IRAs.  Whatever amount of the basis on 2017 Form 8606 line 3 that isn't part of your 2017 IRA distributions carries forward on line 14 to be applied to IRA distributions in future years.

[Need8601]

@dmertz I have two questions as I'd like to make sure I do RMD tax correctly.
(1) To calculate tax on 401(k) RMD (account A as described above), do I use 12/31/2017 401(k) A balance?  Or use the RMD distribution date?  I still have 401(k) A today.

(2) To calculate tax on 401(k) (account B), do I use 12/31/2017 traditional IRA balance as 401(k) B was rolled over to traditional IRA *after* the distribution?  

Just want to make sure.  Thank you so much for your help.

[dmertz]

RMDs are calculated using the year-end balance of the year immediately prior to the year for which the RMD is being calculated.

(1) 401(k) A's RMD for 2017 should have been calculated using the 12/31/2016 balance.  401(k) A's RMD for 2018 is calculated using your 12/31/2017 balance.

(2) 401(k) B's RMD for 2017 should have been calculated using 401(k) B's balance on 12/31/2016.  401(k) B's RMD for 2017 was required to be distributed from 401(k) B before you rolled over any remaining amounts to the traditional IRA in 2017.  401(k) B has no RMD for 2018 because, if I understand correctly, it had a zero balance on 12/31/2017 because you rolled the entire balance in 401(k) B over to a traditional IRA in May 2017.

Your traditional IRA RMDs for 2017 should have been calculated on the 12/31/2016 balances of those accounts.  If the rollover from 401(k) B in May 2017 established a new traditional IRA account, that traditional IRA had no RMD for 2017 because it did not exist on 12/31/2016.  Your RMDs for the traditional IRAs for 2018 are calculated using the traditional IRAs' 12/31/2017 balances.

[Need8601]

@dmertz I am very sorry that I did not say it clearly in the 2 questions I posted last.  These two questions were both on TAX which I need to pay before 4/17/18.  The brokerage firm already calculated RMDs and did the distributions on 401(k) A as well as 401(k) B (after distribution, 401(k) B was rolled over to Traditional IRA).  Before rollover I had no Traditional IRA.  I would like to use your method above which had an example of $190,000 2017 year-end balance, to calculate my taxes.  What I was not (and still am not) sure, is which DATE do I use for 2017 year-end balance on 401(k) A distribution, and which DATE do I use for 2017 year-end balance on 401(k) B distribution.  Thank you for your help.

[dmertz]

Year-end balances are not used in calculating the taxable amounts of the distributions made from 401(k) A and 401(k) B.  The taxable amount is the amount normally shown in box 2a of the Forms 1099-R from these plans.

Year end balances are only used in calculating the taxable amounts of distributions made from traditional IRA accounts; a 401(k) is not an IRA.  When calculating in Part I of Form 8606 the taxable amount of a distribution from a traditional IRA, the amount to be included on line 6 is the amount on December 31 of the year of the Form 8606.

[Need8601]

@dmertz Thank you so much for your time and expertise.  I have learned a lot from you.  I have a new question: how can IRS determine by looking at a 1099-R whether it is a RMD distribution or a normal distribution?  My 1099-R for RMD has code '7' in Box 7 but '7' is also for normal distribution.  In other words if John took $1,000 himself from his Traditional IRA account (not RMD), he gets a 1099-R with code '7'.  If Jane's brokerage did RMD distribution $1,000 from her Traditional IRA account in the same year and she gets her 1099-R with code '7', does her 1099-R look exactly the same everywhere as John's 1099-R?  I have set up with my brokerage firm which will calculate and do RMD distribution for me every year.

[dmertz]

"how can IRS determine by looking at a 1099-R whether it is a RMD distribution or a normal distribution?"

If this is your only regular traditional IRA distribution in 2017, the amount that is RMD is automatically the amount the amount of RMD you were required to take.  The first amounts distributed from your traditional IRA in an RMD year are deemed to be RMD until the RMD for that account is satisfied.  The IRS is able to do the same calculation as your brokerage.  The IRS knows the amount of RMD you were required to take by knowing your birthdate and seeing the FMV shown on the previous year's Form 5498 from the traditional IRA sent to the IRS by the brokerage.