Last two years I withdrew money to for living expenses from IRA.. If I made the contributions with post tax money why do I have to pay tax when I withdraw it?

[VolvoGirl]

Did you take a tax deduction on your tax returns for the contributions?  That turns them into pre-tax.   Or were you under 59 1/2 when you took the withdrawals?  There is a 10% Early Withdrawal Penalty for that.  Turbo Tax should ask you if you made any non deductible contributions.   Oh, what code is in box 7 on the 1099R?  I'll page @dmertz 

[dmertz]

It's your responsibility to track the after-tax contributions so that you can prepare your tax return properly.  The IRA custodian has no way of determining the taxable amount and must mark box 2b Taxable amount not determined for any regular IRA distribution.

[Opus 17]

I think @dmertz meant to say that the IRA custodian has no way of knowing whether your contributions were deductible or not.  

Remember that when you make out of pocket contributions to a traditional pre-tax IRA, you have the option (depending on income and other factors) of taking a tax deduction.  If you took a tax deduction for your contributions, then all your withdrawals are taxable now, because you didn't pay tax on any of the money before.  This discussion only applies if you made contributions to a traditional IRA and didn't take the tax deduction.

If you made non-deductible contributions to a traditional IRA, then you created a form 8606 that year.  Every succeeding year when you made additional non-deductible contributions to a traditional IRA, you would use the information from the prior form 8606 and your current tax return to generate a new form 8606.  This is how you keep track of non-deductible contributions, and it is your responsibility to keep a copy of your most recent form 8606 until you start making withdrawals.  When you withdraw from the IRA, if part of the IRA contributions were non-deductible, you will use your most recent form 8606 to calculate what part of the IRA withdrawal is non-taxable.  That adds a new form 8606 to your tax return and you keep that form (always keep your most recent form 8606) and use it every future year that you make withdrawals until the non-taxable portion of the IRA is used up.

You have to keep track, and file the papers with the IRS to prove part of the withdrawal is non-taxable.  The IRS doesn't do this for you, and neither does the IRA plan. 

[dmertz]

Thanks Opus 17, I corrected my post to say "IRA custodian."

[girlie3723]

I will have to look up the 1099 but I do have a form 8606.  Does that mean it is taxable or not taxable? 

[girlie3723]

And I am under 59.5 

[Opus 17]

Roughly speaking, suppose that 20% of the balance of your IRA can be attributed to non-deductible contributions, while the other 80% of your IRA is composed of deductible contributions and earnings. In that example, 20% of your withdrawal would be non-taxable, and the other 80% of your withdrawal would be taxed. (This is computed on your tax return by taking information from your prior form 8606, and adding it to the current tax tax year.)  I have not tested the scenario, but I would expect that in the tax program, after you enter the 1099R for the withdrawals, TurboTax will ask you if there were any special circumstances. You can indicate that you have non-deductible contributions, and the program should go into asking you about form 8606.

Because of your age, you will also pay an additional 10% penalty for early withdrawal, assessed on the entire amount.  

[Opus 17]

If you are talking about your 2021 and 2022 tax returns, you will have to start by filing an amended 2021 tax return using information from the previous form 8606. Your 2021 tax return will include a 2021 form 8606, which you can then use to amend your 2022 tax return.

[Hal_Al]

You are not allowed to withdraw only your post tax contributions.  

It's best explained by example. Let's say you have a $4,000 balance in all your existing traditional IRAs on 12-31-22 and earlier in 2022 you took out  $6000. Your balance for the year was $10,000 (the 4000 on hand at year end plus the 6000 distribution). That  balance consist of $3,000 in deductible contributions, $2,000 in previous non-deductible (post tax) contributions and $5,000 in earnings (interest, dividends & capital gains). Your basis, in all your IRAs, is $2,000. Only 20% of the $6000 distribution ($1200) will be tax free . TurboTax will divide that $2,000 basis by the $10,000 balance  to arrive at the 20% tax free ratio.  $4,800  of the distribution will be taxable.  This calculation will be shown in Part I of form 8606. 

TurboTax will keep track of your basis, now $800 (2000 -1200 = 800), on form 8606, going forward. 

In the example, what if you only withdrew the $2000 after (post) tax (non deductible) portion of the balance.  You're not allowed to do that (claim the entire distribution as basis).  The calculation would go like this:  You have a $8,000 balance in all your existing traditional IRAs on 12-31-22. Your balance for the year was $10,000 (the 8000 on hand at year end plus the 2000 distribution). That  balance consist of $3,000 in deductible contributions, $2,000 in previous non-deductible (post tax) contributions and $5,000 in earnings. Your basis, in all your IRAs, is $2,000. Only 20% of the $2000 distribution ($400) will be tax free . TurboTax will divide that $2,000 basis by the $10,000 balance  to arrive at the 20% tax free ratio.  $1,600  of the distribution will be taxable.  

[girlie3723]

I am concerned about these 2020-2022 returns.  Is there a way for a TT specialist to review my prior returns and file amended if needed?  I’m not sure where to go from here but all the data is already in TT.  😕 Thanks in advance. 

[Opus 17]

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@girlie3723 wrote:

I am concerned about these 2020-2022 returns.  Is there a way for a TT specialist to review my prior returns and file amended if needed?  I’m not sure where to go from here but all the data is already in TT.  😕 Thanks in advance. 

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Turbotax Online has a Live option (you can speak with a CPA about your return, but you file it) and a Full Service option (the CPA files your return for you using your information).  They are, of course, more expensive than the DIY version.   But I don't know if the Live or Full Service options include assisting with a prior year.

Also, you won't get in trouble if you paid too much tax (if you failed to calculate the non-taxable amount of your withdrawals).  And you have until July 15, 2024 to amend your 2020 tax return and get a refund of any extra tax you paid, so there is no rush to sort this out.  

To start with, let's think about some basic questions.

1. Usually, all your IRA contributions are made with after-tax money (your take-home income) but you then take a tax deduction on your tax return.  

1. Did you ever make IRA contributions and NOT take a tax deduction?  
2. Which years?  
3. Did you file a form 8606 with those tax returns and did you save a copy?  
4. What year is the most recent form 8606 you have with your tax papers?
5. What is the amount on line 14 of your most recent form 8606?  (It says, This is your total basis in traditional IRAs for 2023 and earlier years.)

2. If you withdrew from your IRA in 2020, does your 2020 tax return include a new form 8606?

3. If you withdrew from your IRA in 2021, does your 2021 tax return include a new form 8606?

4. If you withdrew from your IRA in 2022, does your 2022 tax return include a new form 8606?