Crediting Non Deductible IRA contributions to IRA distributions

[AStone4Geriatrics]

This tax year (2019) I started distributions from my IRA that I have made Non Deductible contributions to.  When I researched this I found 2 different methods for calculating how to credit the Non Deductible portion of the distribution.

1st: When I take a deduction I use the non deductible portion and subtract it from the total distribution. Once I’ve offset the entire Non Deductible contribution, anything else is taxed as ordinary income. Sort of a first in first out format.
2nd: Take my total Non Deductible contributions and divide it by the end of year balance of the IRA account. I use that percentage on the amount of the yearly distribution. The calculated percentage is Non taxable (the Non Deductible portion). The remainder is taxable as ordinary income (the gains on the account).

Which method is correct?

[KurtL1]

When you take a distribution from an IRA that is composed of Taxable and Non Taxable contributions each distribution is partially taxable and partially non taxable. Distributions Fully or Partly Taxable 

If your traditional IRA includes nondeductible contributions and you received a distribution from it in 2019, you must use Form 8606 to figure how much of your 2019 IRA distribution is tax free.

Form 8606  Instructions for Form 8606

[dmertz]

Method 1 is far from correct (unless you have a zero balance in traditional IRAs at year end) but method 2 doesn't correctly describe the calculation either.  The required calculation is done on Form 8606.  Generally, the proportion of the distribution that is non-taxable is your basis in nondeductible traditional IRA contributions divided by the sum of your year-end traditional IRA balance plus the amount of your distributions during the year.

To cause TurboTax to prepare Form 8606 , after entering the Forms 1099-R reporting the distributions click the Continue button on the Your 1099-R Entries page, indicate that you made nondeductible traditional IRA contributions, enter or confirm you basis from contributions prior to the current tax year (the amount from, usually, line 14 of your most recently filed previous Form 8606), and your year-end balance in traditional IRAs.

[Anonymous]

on 12/31/2019 how old are you may I ask?  If you are taking RMD's you may be too old, according to the IRS, to be making IRA contributions.     

[AStone4Geriatrics]

64.  I'm NOT making contributions anymore.  The contributions were years ago while I was working, but earning too much for the contributions to be deductible.  What I want to know is which method to use to account for the non deductible contributions when I make distributions/withdrawls.

[AStone4Geriatrics]

Thanks to dmertz & KurtL1.  So it seems that the calculation happens through filling out Form 8606 with the Deductible and Non Deductible contributions correctly.  Thanks

[njarif]

I have two Rollover IRAs;  Rollover IRA #1 and Rollover IRA #2.   Rollover IRA # 1 has non-deductible contribution and has been reported on 8606.   I had taken a distribution from Rollover IRA #1 in 2019.  What do I enter for 8606 Line 6 for a year-end IRA values;  would it be just year-end value for Rollover RA#1 which contains a nondeductible balance or year-end value for both RA#1+IRA#2?

[dmertz]

Your basis in nondeductible traditional IRA contributions is not in any particular one of your IRAs, it applies to your traditional IRAs in aggregate as if they were a single IRA.  The year-end value is the sum of all of your traditional IRAs.  That would be (IRA#1+IRA#2 assuming that these are your only traditional IRAs.

[njarif]

Dmertz

Thank you for the reply. Is a rollover IRA considered as a traditional IRA for the purpose of determining year-end value that goes on form 8606 Line 6?

[DaveF1006]

Generally a rollover contribution is typically a traditional IRA contribution. 

[dmertz]

Yes, a rollover IRA is a traditional IRA.