Q: I
must
start taking required minimum distributions (RMDs) from my IRA
next year. I have some IRAs to which I made tax-deductible
contributions, and others to which I made non-deductible contributions.
When calculating
my required minimum distribution, do I include the value of all my
IRAs, or only the value of the before-tax IRAs -- i.e., the ones to which I made tax-deductible contributions? -- JM via email
A:
You were smart to keep your deductible and non-deductible contributions
in different IRAs. It can be a real headache to take distributions from
an IRA that contains both!
Your 2010 required distribution is going to be based on the total
balance in all your traditional IRAs on December 31 2009.
For purposes of this calculation, it doesn't matter whether or not you got a tax deduction for the IRA contributions. To the Internal Revenue Service, your IRA is just one pool of money, no matter how many accounts you have or how many contributions were deductible and how many weren't.
(Please note that we're talking about traditional IRAs. Don't include Roth IRAs in this calculation! You never have to take a distribution from your Roth IRA.)
As
long as you take the correct dollar amount, you can take your required
minimum distribution from any one of your IRAs or from several IRAs.
But in your case, the income taxes you owe on that distribution will depend on
which IRAs you tap for the required amount.
When you take money from a IRA that was funded with non-deductible contributions, only the earnings are taxable. Your original contributions are tax-free because you paid taxes on them before putting them into the IRA -- and each withdrawal is going to include some tax-free return of a contribution. "Making non-deductible IRA contributions is like putting cream in a cup of coffee. You can't take it out separately," says Ed Slott, a Rockville Centre NY tax accountant. "There's going to be a little cream in every sip you take."
To determine what percentage of each withdrawal is tax-free, you have to add up all your non-deductible contributions to the account and calculate what proportion of the total IRA balance they represent. "Let's say you make $2,000 of non-deductible contributions and the IRA is now worth $10,000," says Slott. "That means 80% of the account is tax-deferred earnings and 20% is after-tax contributions. When you take withdrawals, 80% of each withdrawal will be taxable, and 20% will be tax-free."
Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are only addressed online.
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