Calculation for IRA Withdrawal Taxation
Is the taxation rate recalculated each year for IRA withdrawals?
If an IRA had $30k in after tax contribution and was worth $300k then each withdrawal would be 10% tax exempt (30/300). If $20k is removed then the amount of after-tax (non taxable) income of this withdrawal would be 10% x $20k or $2k.
The total amount of after tax in the IRA would then be $30k-$2k withdrawn or $28k. If the value of the account grows to $500k before more funds are removed then the new tax free rate would be 28/500 or 5.6%.
Is this the correct calculation method?
Permalink Submitted by Alan Spross on Mon, 2009-09-28 21:55
Yes, the % of each distribution that is taxable is recalculated each year on Form 8606 based on adjusted year end valuation.
You are correct to note that the pro rate rules apply to the return of basis, and for each dollar of basis returned in a given year, the remaining year end amount of basis is reduced by a dollar. Your math appears to be correct. Growth of the total account value will increase the taxable portion of future distributions, and vice versa.