Tax Year Prior to 2020: My bank said that I shouldn't pay taxes on my traditional IRA withdrawal because I opened post tax money transferred from my checking. Is that correct?

[ssetayeshfar]

It was an early withdrawal, and I have the document from 2016 that shows the transfer from my checking to it. I have not add any more money to that IRA account afterwards.

[VictorW9]

Any earnings on those after-tax contributions are considered pre-tax balances—so taxes would have to be paid on withdrawals of the earnings (unless they are rolled over to an IRA) and there may be a 10% penalty if you're under age 59½. Taking out just the after-tax balance would not be allowed.

[ssetayeshfar]

Hi VictorW9,

Thanks for your reply.

I only gained $8 on this IRA in 4 years. I guess I only have to pay the 10 percent because I'm under 59? Also, does it even matter if you open the IRA with after tax money or before tax then?

[CatinaT1]

For the penalty, it does not matter what type of IRA it is.  If it's an early distribution the penalty will apply.

[ssetayeshfar]

Thank you for the answer. I know that bank staff are not experts in taxes but I assume if it's someone's job dealing with IRAs they should know this. The lady who helped me at the bank told me that because I opened the IRA account with after tax money from a checking account I don't have to play taxes on it!

[BillM223]

All contributions to a traditional IRA from you are using "after-tax dollars". The question is whether or not you deducted the contribution to the IRA  (this would be normal for a traditional IRA). If you deducted the IRA contribution, then the money in the IRA is pre-tax. Only if you did not deduct the contributions would the dollars remain after-tax.

[ssetayeshfar]

Hi Bill,

Dumb question: How do I know if I deducted? Should I go back to the year I opened the IRA account and look at my taxes that year? Is there a specific form? I opened the IRA account in 2016 and did not contribute any money to it after that year so I guess if I deducted it must have been then.

Thanks.

[BillM223]

Yes, if you did the contribution in tax year 2016 and it was deducted, then it would show on line 32 of your 2016 1040.

It's much more likely that you did than you didn't.

[ssetayeshfar]

Hi Bill,

Thanks very much for helping me.

One final question: So I went back to my 2015 tax documents and I do have the IRA amount in line 32 (IRA Deduction). This is the only time I put money in my IRA. I added nothing after opening it back in 2015. So, since I have fully deducted the amount, do I know add "0" in Turbo tax for "Total basis as of December 2018" box? Do I need to fill out any additional forms now?

Thanks again.

Sepideh

[DavidD66]

Yes, you would indicate that your basis is $0.00.  There are no additional forms you need to complete.