How to Calculate the Taxable Portion of a Traditional IRA Distribution

Some of your traditional IRA distribution might be tax-exempt.

Some of your traditional IRA distribution might be tax-exempt.

Distributions from a traditional IRA are usually taxable as ordinary income, but sometimes part of a withdrawal is tax exempt. If you’ve made nondeductible contributions to a traditional IRA in the past, the Internal Revenue Service didn’t give you a tax break for putting that money into the IRA. This means you already paid income on nondeductible contributions. This money, called your IRA basis, isn’t taxed again when you withdraw it. However, the IRS won’t let you take out just IRA basis dollars, so you need to know how to calculate the taxable portion of a traditional IRA distribution.

File IRS Form 8086 with your tax return each year you make nondeductible contributions to your traditional IRA. Form 8086 documents your IRA basis so you know how much in nondeductible contributions you have. This information is important because you won’t have to pay taxes on it when you take a distribution.

Add up all of your nondeductible contributions to date. Subtract any previous nondeductible contributions you’ve already removed from the IRA. The result is you IRA basis.

Divide the IRA basis by the balance in your traditional IRA account to find the percentage of the balance that is your IRA basis. For example, if you have a balance of $75,000 and an IRA basis of $15,000, divide $15,000 by $75,000, which works out to 20 percent.

Multiply the amount of the traditional IRA distribution by the percentage of IRA basis. If the basis percentage is 20 percent and you take out $10,000, you would multiply $10,000 by 20 percent, which equals $2,000.

Subtract the IRA basis part of the distribution from the total distribution. In the example in step 4, subtract $2,000 from $10,000, leaving $8,000. This is the taxable portion of the traditional IRA distribution.

Tip

  • You can wind up with nondeductible contributions to a traditional IRA when you or your spouse is covered by a retirement plan where you work. If this is the case, the IRS sets income limits. If your adjusted gross income exceeds these limits, you can still make contributions up to the annual limit, but they are not tax deductible.

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