Tell us the value of your traditional IRA

[richardR1]

I entered my8406 info. Had no ROTH conversions in 2024 but when i entered the value of my total IRAs, my tax obligation increased. Why? I entered prior tax returns with sep conversions and those were treated as income so  why in 2024 w/o any roth conversions entering the value of my IRAs cause me a tax increase?

[DanaB27]

To clarify, you received a Form 1099-R form which account? 

Please note,  if you took a distribution from a traditional, traditional SEP, and traditional SIMPLE IRAs this distribution will be reported on Form 8606 when you had a basis.  The value of all your traditional, traditional SEP, and traditional SIMPLE IRAs will affect how much it taxable according to the pro-rata rule.

[richardR1]

can you explain the pro-rata rule? I have an IRA with an annuity which is distributed each year. When I enter the total IRA end of year my taxes go up...I assume its treated as ordinary income and then some portion of 8606 is calculated and the balance is my taxes for the distribution?

[BillM223 · Accepted solution]

1. The pro-rata rule.

When you have "basis" (i.e. after-tax contributions) in your IRA, this basis is returned to you in distributions over time according to the pro-rate rule. This is important because basis that is returned to you in a distribution is not taxable (having been taxed already once). So when you have an IRA distribution, you take the amount of basis in your IRA and divide it by the total amount in the IRA to get a percentage amount, that you apply to the distribution. So, $1,000 in basis and $10,000 in total assets in the IRA, means that 10% of your distributions is nontaxable.

NOTE: the denominator above ($10,000) should actually be the sum of all your traditional IRA, SEP, and SIMPLE IRA accounts.

2. "When I enter the total IRA end of year my taxes go up."

As you can see, entering the total of your IRAs changes the pro-rata calculation above. The larger the denominator is, the more of the IRA distribution will be taxable income, so it makes sense that your tax will increase.