When two Trad IRAs opened --one with a basis & one without-- what percentage of distributions are tax-exempt?

[Jacks-son]

All instructions I’ve ever read to determine the tax-exempt percentage of a withdrawal from a Trad IRA requires dividing the basis of a Trad IRA by its total value at the end of the previous year.  In my case, however, the total value of my Trad IRA at the end of 2023 was $zero, and two different Trad IRAs were opened in 2024.

Early in 2024, I made a $1000 deposit of after-tax dollars. A few months later, it had earned $50 and I converted the total, $1,050, to my Roth IRA.

Later in 2024, my advisor convinced me to roll over $9,000 from a 401(k) to a Trad IRA. All contributions to the 401(k) had been in pretax dollars (no basis). Before the end of 2024, $250 was withdrawn from this IRA.

How much of the conversion and the withdrawal is taxable vs. tax exempt? For the conversion, are $1000 tax-exempt and $50 taxable, and then is the entire $250 of the withdrawal taxable?

Or do I have to calculate the percent of after-tax money deposited into the accounts during the year [$1,000/($1,000 + $9,000) = 10%], and then multiply the conversion amount and the withdrawal by that factor to determine the tax-exempt amount [10% x $1050 + 10% x $250 = $105 + $25 = $130 tax-exempt and $1,170 taxable]?

Or is it calculated by yet some other method?

[dmertz · Accepted solution]

All of your traditional IRAs are treated in aggregate for this purpose.  Your basis in nondeductible traditional IRA contributions does not reside in any particular one of your traditional IRAs.

If you had a total of $1,300 in distributions and Roth conversions and your year-end balance in traditional IRAs is $8,750, the nontaxable amount of the $1,300 is:

$1,300 * $1000 / ($1,300 + $8,750) = $129 (rounded)

leaving  $1,171 as taxable and leaving $871 of basis in nondeductible traditional IRA contributions in your traditional IRAs to be applied to future traditional IRA distributions.

You latter calculation is almost correct except that the first part of your calculation omits the effect of the $50 of investment gain.  The nontaxable portion is is 9.95%, not 10%.

[Jacks-son]

Thank you, dmertz!