How do I calculate the non-taxable portion of an IRA distribution when part of the IRA funds are pre-tax and part are after tax?

[roberthg]

The IRA was funded with 95% pretax dollars and 5% after tax dollars.  Trying to determine how much of the RMD is non-taxable as a result

[AnnetteB · Accepted solution]

If 95% was funded with pretax dollars, then generally 95% of the distribution should be taxable.

You will not need to do the calculation to determine that amount on your own.  TurboTax will make the calculation based on information that you will enter about your IRA account. 

When you enter the information that was reported on your Form 1099-R for your distribution from the IRA that includes non-deductible contributions, there will be a series of follow-up questions to answer at the end of that section of the tax return. 

When you have entered all of the Form 1099-Rs that you received, you will be on the “Your 1099-R Entries” summary screen.  Click Continue to move forward and answer more questions.  These questions will include things such as whether non-deductible contributions were made and tracked in previous years, IRA total basis, the value of all Traditional IRAs, and any other details needed to calculate the taxable amount of the distribution.   

[roberthg]

In completing the IRA section I am unable to find the section referred to above that that would generate these follow-on questions.

[dmertz]

Click the Continue button on the Your 1099-R Entries page.  If the after-tax money in your traditional IRAs came from an employer plan, click the EasyGuide button on the Let's Find Your IRA Basis page.

[CN11]

Calculation of the non-taxable portion of an IRA distribution due to a basis in the IRA has little bearing upon the percentage of the IRA funding with pre-tax dollars. Form 8606 guides the calculations, and the balance of  unrecovered taxed contributions from the the prior tax year is  applied. Generally, distributions (RMDs and Roth conversions, but not tax-free rollovers)  are added to the year-end value (V) of all IRAs to determine the total value of the IRAs. Subtracting the unrecovered taxed contributions (U) from that total yields the accumulated earnings (A) of your IRAs due to taxed and non-taxed contributions. The ratio of the unrecovered taxed contributions to the accumulated earnings (U/A) establishes the fraction of the earnings due to the taxed contributions. Multiplying that ratio (U/A) times the amount of the distribution (D) determines the non-taxable portion of the distribution.

As an example, consider that your first RMD has occurred, your pre-tax contributions were $95,000 and your after tax (taxed) contributions (U) were $5000. That conforms to your 95% and 5% funding relationship. Further consider that the year-end value (V) of your IRAs happens to be $900,000 and for an age factor of 27.40 applied to the prior year-end value of $880,000 the RMD (D) is $880,000 /27.40 = $32,117. The total value of your IRAs for the year of distribution is V + D = 900,000 +  32,117 = 932,117.  Then accumulated earnings A = V + D - U = 932,117 - 5000 = 927,117.  The ratio of U to A is U/A = 0.0054 (rounded to 4 decimal places). Finally, (U/A) * D = 0.0054 * 32,117 = 173 (rounded to 0 decimal places), and is the untaxed portion of your RMD. The taxable portion then becomes D - (U/A) * D = 32,117 - 173 = 31,944.

It is helpful to understand the underlying calculations when one uses the step-by-step procedures to enter your data.

[dmertz]

"The ratio of the unrecovered taxed contributions to the accumulated earnings (U/A) establishes the fraction of the earnings due to the taxed contributions."

This is correct only if only nondeductible contributions were made.  Regardless, it's a meaningless number with regard to determining the taxable and nontaxable amounts.

"Multiplying that ratio (U/A) times the amount of the distribution (D) determines the non-taxable portion of the distribution."

No, that's wrong.

In your example with $5,000 of basis in nondeductible traditional IRA contributions, a $32,117 distribution during the year and a $900,000 balance at the end of the year, the fraction that is nontaxable is:

$5,000 / ($900,000 + $32,117) = 0.005364

You instead incorrectly calculated that fraction as:

$5,000/ ($900,000 + $32,117 - 5000) = 0.005393

The only reason that these calculations are close is that you used a very large year-end balance.  If the year-end balance was instead $10,000, the correct calculation would produce a nontaxable fraction of:

$5,000 / ($10,000 + $32,117) = 0.1187

while your incorrectly calculated fraction would be:

$5,000/ ($10,000 + $32,117 - 5000) = 0.1347

[CN11]

There were a few inadvertent errors in my original posting. Here follows the revision:

Calculation of the federal non-taxable portion of an IRA distribution due to a basis in the IRA has little bearing upon the percentage of the IRA funding with pre-tax dollars. Form 8606 guides the calculations, and the balance of  unrecovered taxed contributions from the prior tax year is applied.

Generally, distributions (RMDs and Roth conversions, but not tax-free rollovers) are added to the year-end value (V) of all IRAs to determine the total value (Vt) of the IRAs. Subtracting the unrecovered taxed contributions (U) from that total represents all earnings plus pre-tax contributions (A = Vt - U), that are fully taxable upon distribution.The ratio of the unrecovered taxed contributions U to the total value Vt establishes the fractional part of Vt that U represents. Equivalently, the ratio of A to the total value Vt establishes the fractional part that A, all earnings plus pre-tax contributions, represents.

Multiplying the ratio (U/Vt) times the amount of the distribution (D) determines the non-taxable portion of the distribution that is a partial return of the basis, and the taxable part of the distribution (Dtax) is calculated by subtracting the partial return of the basis from the distribution. For a total distribution, V = 0 and Vt = D, so that (U/Vt) * D = (U/D) * D = U; in other words, the return of your entire remaining basis is untaxed.  If U = 0, you have no basis, the entire distribution is taxed with no need for form 8606.
 
As an example, consider that your first RMD has occurred, your pre-tax contributions were $95,000 and your after tax (taxed) contributions (U) were $5000. That conforms to your 95% and 5% funding relationship. Further consider that the year-end value (V) of your IRAs happens to be $900,000 and for an age factor of 27.40 applied to the prior year-end value of $880,000 the RMD (D) is $880,000 /27.40 = $32,117. The total value of your IRAs for the year of distribution is Vt = V + D = 900,000 +  32,117 = 932,117. The ratio of U to Vt is U/Vt = 0.0054 (rounded to 4 decimal places). Finally, (U/Vt) * D = 0.0054 * 32,117 = 173 (rounded to 0 decimal places), and is the untaxed portion of the RMD, a partial return of the basis. The taxable portion then becomes D - (U/Vt) * D = 32,117 - 173 = 31,944.

Alternatively for this example, A = Vt -U = 932,117 - 5000 = 927,117 and A/(Vt) = 927,117/932,117 = 0.9946. For D = 32,117, D  *  A/(Vt) = 32117 *  0.9946 = 31,943.5682 which rounds to 31944.

Consider the modified example offered by dmertz, with year-end value at $10,000 but the same distribution of $32,117 and after tax (taxed) contributions of $5000. In this case Vt = V + D = 10,000 + 32,117 and (U/Vt) * D is the nontaxable part of the distribution:

(5,000 / (10,000 + 32,117)) * 32,117

= (5,000 / 42,117) * 32,117

= 0.1187 * 32,117 = 3812 (rounded)

So the taxable part is $32,117 - $3,812 = $28,305

Using the alternative approach of A = V + D - U = Vt - U = 42,117 -5,000 = 37,117, then (A/Vt) * D yields directly the taxable part of the distribution:

(37,117 / 42,117) * 32,117

= 0.8813 * 32,117 = 28,305

and the non-taxable part is the difference of the taxable part from the value of the distribution:

$32,117 - $28,305 = $3,812

Note 1:

Form 8606 has line-by-line entry for all of the data with D provided as total ordinary IRA distributions (Dord) and total Roth conversion distributions (Drc) on separate lines (line 7 and line 8). The fraction U/Vt (line 10) is multiplied times each of those two distribution values and the resulting values of untaxed portions placed on  lines 11 and 12. The sum of the two values of untaxed portions is entered on line 13, which represents the basis change for the current tax year, and is used in the calculation of the remaining basis applicable to the next tax year.

Note 2:

In case non-deductable contributions are made during the current tax year and for the current tax year during 1/1 through 4/15 of the following calendar year, Form 8606 determines the basis through the year end of the current for calculations of taxable and non-taxable portions of IRA distributions.

[yumdc99]

Question:  I did Roth Conversion in 2020 without taking RMD.  I also paid federal tax from IRA, which directly went to IRS.  In calculating Vt (V + D), do I include both converted amount and tax payment, in other words, does D is the sum of converted amount and tax payment?  Thanks for your help.

[dmertz]

Both are included in D.  The amount withheld for taxes and not converted to Roth will appear on Form 8606 line 7 while the converted amount will appear on 8.  These will get summed on line 9 along with the year-end value on line 6.

[Millie5]

Where do I get the age factor  referenced in your  post of April 3, 2020?  Or, how do I determine it?

[MarilynG1]

In the MY INFO section where you give your birthdate is how TurboTax decides to present you with the RMD question when entering a 1099-R. 

If Turbo Tax is asking if your pension is a RMD say yes.  Anything your pension pays you is considered to be RMD.

RMD is taxed the same way as other retirement income.  The IRS just wants you to confirm that you are taking your RMD if you are over 70.5.

Click this link for more info on RMD.

[dmertz]

The age factor that you should have used to determine your 2021 RMD comes from the appropriate table in Appendix B of 2020 IRS Pub 590-B.  (2021 Pub 590-B has not yet been published but will have identical tables.

If you are instead trying to determine your RMD for 2022, you'll need to use revised tables that so far have only been published in the Federal Register:  https://www.govinfo.gov/content/pkg/FR-2020-11-12/pdf/2020-24723.pdf

[thienhngo]

How do you calculate the age factor of 27.40?  Since I have contributed total of 30 years to the IRA.

Do I need to find out the total amount of pre-tax and post-tax  contribution to the IRA in 30 years?

Need to find out the the ratio between the pre-tax IRA and post-tax IRA  to pay tax on this year IRA distribution.

[JulieS]

Yes, in order to figure out the non-taxable portion of a Traditional IRA distribution, you need to know the amount of non-deductible contributions made. 

The ratios are meaningless, the amount that is nontaxable is calculated on Form 8606 each year, based upon the amount of IRA basis that you have.

Your IRA basis is the amount of non-deductible contributions that you made, less any amount you have already distributed tax free. 

In the context of an IRA, pre-tax and post-tax are confusing, unless this is an employer plan. If your plan is from an employer, you may have a post-tax amount and they will need to share that with you. 

In the much more common scenario where you open an IRA at your bank or broker and contribute to it with your post tax dollars, the only real question is did you deduct your contribution. 

If you contributed and did not deduct your contribution and you left the amount in your IRA, you file Form 8606 and report to the IRS that you made a non-deductible contribution. 

When you start taking distributions, you figure the amount that is not taxable using Form 8606. 

TurboTax addresses this issue very clearly in the IRA section, allowing you to enter non-deductible contributions made in the past. Here is how to find this in TurboTax:

1. Select Federal from the left side menu.
2. Select Deductions and Credits. 
3. Expand the list and scroll down to Retirement and Investments.
4. Expand the section and click Start to the right of Traditional and Roth IRA Contributions. 
5. Check the type of IRA accounts you have and then answer the questions about contributions. 

[thienhngo]

This is my first year to take a distribution out of  the IRA.  My problem here is the Investment company rollover my 401K to Traditional IRA then they combine my post-tax IRA into one.

Here are my basic cost contribution to the (401K) IRA   $311298.00  (pre-tax)

                       basic cost contribution to IRA                        $65869.00 (post-tax)

                       current balance of the combine IRA           $900000.00

This 2022 take out (distribution) $30000 from the combine IRA

How do I know how much tax to pay for $30000 distribution? 

(65869/311298=21%) should I subtract

30000-6300(21%)= 23700 and paid tax on this IRA amount?

In Turbo Tax section Retirement Plans and Social Security

Select Update on IRA, 401K pension withdraws (1099-R)

Then update  line 2a Taxable amount of 1099-R form from 30000 to 23700

Please advise.

Thien