IRA - RMD

[Leonard II]

I have a regular IRA funded over the years completely by after tax contributions.  Last year when I tried to enter cost the of the RMD which was not known by the bank it had no effect on the tax.  After several tries I filed it with zero cost.  How can this be?  This year I would like to enter the cost and see it reduce the tax on the RMD.  Could you please comment?  Many thanks, Len

[xmasbaby0]

The "cost" of your RMD?   Are you referring to fees charged by the financial institution that manages your retirement fund?  When the tax laws changed for 2018 and beyond, the miscellaneous deduction for such charges was eliminated.

[DavidD66]

First of all, did you file a Form 8606 for each year you made a non-deductible contribution to, or took a withdrawal from your IRA?  If not, you need to do so.  IRS Pub 590-A states that any amount of nondeductible traditional IRA contributions not properly reported (i.e. on a Form 8606) will treated as pre-tax money in the IRA.  Form 8606 can be filed by itself.  If you don't have an updated Form 8606 that has been carrying forward in TurboTax, you will have to determine your correct cost basis and enter it on your Form 8606.  While working in your return in TurboTax Online:

• Click on Tax Tools in the gray ribbon on your left
• Click on Tools
• Select Topic  Search and type in IRA Contribution  
• Click on GO 
• Select "Traditional IRA"
• Continue through the questions until you get to the page "Any Nondeductible Contributions to Your IRA?" 
• Mark "Yes" and Continue
• Enter your Total Basis as of December 31, 2023

If you took a distribution in 2023 and reported it on your tax return with a zero cost basis, you will need to file an amended return for 2023 in order to get the correct cost basis for 2024.

For information on how to amend a return, see the following TurboTax Article: 

How do I amend my federal tax return for a prior year?

[Leonard II]

Hi Thanks for your response.  The cost I am referring to the amount of my after tax contributions which should reduce the tax on the RMD but for some reason last year did not.  The RMD had two components my after tax contributions  which I think is the cost basis and the gain in the value of the securities.  Please advise.  Thanks, Len

[DavidD66]

Yes, if you funded your Traditional IRA with after tax contributions, then any distribution will take will have two components:  1) the cost basis, and 2) the increase in value of funds.  Lets say you make after tax (non-deductible) contributions to a traditional IRA over the years of $25,000, and the account balance grows to $100,000.  If that is the only traditional IRA you have, then a distribution from that IRA would be 25% non-taxable return of basis, and 75% taxable growth.  However, if you have another traditional IRA, it must also be included in your calculation of the taxable and non-taxable amounts.  If, in addition to the $100,000 IRA previously discussed you have another IRA with $100,000, and that IRA is a 401(k) rollover that was 100% funded by pre-tax contributions.  Your distribution from the IRA funded with after-tax contributions will be 12.5% non-taxable and 87.5% taxable.

The taxable vs non-taxable portion of your IRA distributions are calculated on Form 8606.  Every after-tax contribution to your IRA should have been reported on a Form 8606 and filed with your tax return for that year.  The information on the 8606 rolls forward each year and has the cumulative after-tax contributions that you made.  If you haven't been preparing and filing Forms 8606 each year, the you need to complete one for 2024 and add the cumulative after -tax contributions.  

After you enter all of your Forms 1099-R, there will be some additional questions.  One of these is "Any Nondeductible Contributions to Your IRA?"  Mark the "Yes" button and Continue. The next screen says "Let's  Find  Your  IRA  Basis".  You will be prompted to enter the amount of your IRA total basis which will be on your 2023 Form 8606 if you have been filing and rolling forward Form 8606 each year.   If your 2023 tax return doesn't include Form 8606, click on the EasyGuide to enter your cost basis and generate a Form 8606 for your return.