What is a non-deductible IRA? And how are distributions from non-deductible IRAs taxed?
Our Retirement Daily’s Robert Powell caught up with Jeffrey Levine, CPA and tax professional from Buckingham Strategic Wealth Partners, to reply this query and extra.
Recommended Read: What is IRS Form 8606: Nondeductible IRAs
Watch the video interview above, or learn the video transcript under.
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Video Transcript| Jeffrey Levine, CPA and Tax Expert, Buckingham Strategic Wealth
Robert Powell: How are distributions from a non-deductible IRA taxed? Here to speak with me about that is Jeffrey Levine from Buckingham. Jeffrey, welcome.
Jeffrey Levine: Good to be with you, Bob. And probably the most widespread questions I see from customers on a regular basis is, how is the cash in my IRA taxed when a few of it’s after-tax non-deductible contributions and a few of it’s progress? Now, the overall rule of thumb right here is that distributions will likely be topic to what’s often known as the Pro-Rata Rule, which successfully means the ratio of your tax-free {dollars} to your complete IRA stability will keep (the identical) as you’re taking distributions out of your account.
So, for argument’s sake, when you have $10,000 of nondeductible contributions and your complete IRA stability is $100,000, effectively, that is 10% of your cash (that) is after tax. So, if you take a distribution, 10% of that distribution can be thought-about tax-free. So, for argument’s sake, on this instance, suppose I took a $4,000 distribution from that $100,000 IRA. Well, 10% of the $4,000 is $400. That can be tax-free. And the remaining $3,600 can be taxable.
Robert Powell: And if somebody has a number of IRAs, one IRA with the non-deductible cash and others with the deductible IRA, the Pro-Rata Rule would nonetheless apply typically?
Jeffrey Levine: That’s proper. You stated they’ve a number of IRAs and within the eyes of the IRS, there is no such thing as a such factor as a number of IRAs. You simply have one big IRA. Wherever you occur to retailer that IRA is as much as you. So you might need some at establishment A and a few at establishment B, however within the eyes of the IRS, it’s all one big IRA. So, when calculating that Pro-Rata quantity, we’ll take the after-tax {dollars} held in all of these completely different accounts and we’ll take a look at it as in comparison with the entire stability of all of these completely different accounts. And that’s in the end the proportion that’s tax-free as you make distributions.
Robert Powell: Right, and on condition that no job is completed till the paperwork’s carried out, it is essential to have what kind, 8606?
Jeffrey Levine: That’s proper. Form 8606 which studies after-tax quantities in conventional IRAs. That can be the shape that you just need to be certain that is filed any time after-tax cash goes into or out of a conventional IRA.
Editor’s Note: The content material was reviewed for tax accuracy by a TurboTax CPA skilled.
Zach Faulds contributed to the writing of this text and produced the video and the graphics related to it.
Source: www.thestreet.com
