Taxble Portion of Distribution
Folks
Joe, 75 and retired, has an IRA. While working, his income was initially low enough to allow him to get “pretax” credit on his 1040’s. Later, his income grew to preclude that, so his later contributions, totaling $20K, were “after tax”, and regarded as “basis”. Based on the value of his account on Dec 31, 2012, his RMD for this year is $10K. Currently his account is worth $200K; thus 10% of it is basis. If he takes his $10K RMD today, only $9K should be taxable for tax year 2013. However, I have begun to get the impression that the taxable fraction is actually supposed to be calculated based, not on the initial total value of the account at the time of distribution, but instead on the value of the remaining account at the end of the year, ie, Dec 31, 2013, even though the RMD has been removed from it. This seems totally bizarre. What’s the story?
Thanks.
DBRJ
Permalink Submitted by Alan - IRA critic on Sat, 2013-03-02 20:11
The taxable % of any distributions IS based on the year end (not prior year end) adjusted value of all owned non Roth IRAs, and since there is no way to know whether the IRA will have gains or losses between the distribution date and year end, the taxable amount will remain unknown, although generally Joe will have a pretty good idea. Gains will increase the taxable portion of the RMD and losses will reduce it. Hopefully Joe filed an 8606 every year he made non deductible contributions or the IRS will not recognize any basis he says he has. The amount of basis he has coming into 2013 will show on line 14 of his 2012 8606.