taxation on RMDs
I just withdrew the required mandatory minimum from one of my IRA accounts that covered all of my investment accounts. So that I wouldn’t have a huge tax burden, I also requested that the taxes be withheld and sent to IRS.
Since my IRAs are not pre-tax accounts, is there any way to reduce my tax burden?
Permalink Submitted by Alan - IRA critic on Wed, 2015-11-11 17:20
Most non Roth IRA accounts are pre tax or mostly pre tax, and therefore the entire RMD will be taxable. However, if you made non deductible contributions to any of your IRA accounts in the past, you should have reported these non deductible contributions on Form 8606. You also use this form to report distributions (including RMDs) and it calculates how much of your RMD is taxable. The calculation is a pro rate %. For example, if you made 40,000 of non deductible contributions and the balance of all your non Roth IRAs is 160,000, then 25% of your distribution is non taxable and 75% is taxable. The withheld taxes are applied to your entire tax liability of which the RMD is just a portion of the taxable income, so you can usually determine exactly what amount you want withheld even if your RMD was completely non taxable itself.
Permalink Submitted by Delores Walters on Thu, 2015-11-12 00:19
What is an example of a non-deductible contribution pertaining to an IRA or SRA? Is this something that is typical?
Permalink Submitted by Alan - IRA critic on Thu, 2015-11-12 00:59
It is somewhat rare, and used mostly by higher income people who do not qualify for the IRA deduction or for a Roth IRA contribution. In years you made a TIRA contribution, there should either be a deduction for it on line 32 of Form 1040 OR a Form 8606 reporting the contribution as non deductible. Such non deductible TIRA contributions could date as far back as 1987. You might check some of your older tax returns if you still have them to see if you made a contribution and deducted it. You may also have rolled over an employer account like a 401k or 403b to an IRA. Most of these balances are also pre tax. In other words, if you never paid taxes on these contributions (pre tax), then they are taxable when you take distributions from the IRA.