IRA Distribution after age 59 1/2 and before 70 1/2 with basis

Submitted by Carol Strong on Thu, 2017-03-02 21:38

We are 68 years old. We rolled over a company 401k to a rollover IRA several years ago (about 7). Six years ago we began adding maximum non-deductible annual IRA contributions to the IRA account and filed Form 8606s with our income taxes for the following 5 years. In 2015 we took our first distribution from the IRA. The total value of the IRA with the rollover 401K is quite a bit larger than the 5 year basis we incurred with the IRA contributions from 2011-2015. I don’t understand why the amount of taxes that we are billed is significantly increased when the total value of the IRA is included on the Income Tax form as it asks. Taxes were withheld from the distributions when they were received. It seems like we are being taxed twice. Can you please explain.



Submitted by Alan - IRA critic on Thu, 2017-03-02 22:20

Form 8606 does not generate double taxation. The non deductible contributions you added produce a non taxable portion of each distribution. In 2015 when you took the distribution, if your non deductible contributions added up to 20,000 and the rest of the IRA to 180,000, the 10% of each distribution is non taxable. If you withdrew 10,000 the taxable portion would then be 9,000. Your remaining basis per line 14 of the 8606 would then be 19,000 for use in future years. Whatever taxable % you will have will stay relatively even throughout your RMD years. If you have good gains in your IRA, the taxable portion will rise somewhat.



Submitted by Carol Strong on Fri, 2017-03-03 16:51

What you are saying sounds reasonable, but maybe we did something wrong when we added a non-deductible contribution to an existing rollover IRA in 2011 and perhaps opened a second IRA.  The rollover IRA was originally a 401K until I left employment and was over $1M.  I contributed $25k in non-deductible contributions in the 5 years since 2011 and reported the contributions on Form 8606.  The first withdrawal was in 2015 for $39K.  I had 15% withheld in Fed. taxes from the withdrawal.  The $25k basis was only reduced by $800 on that year’s 8606.  It didn’t surprise me or set-off any alarms because it was all new to me.  In 2016 we withdrew $69k, again Fed and State taxes were withheld from the withdrawal.  While preparing our income taxes this year I initially forgot to put in the total value of the IRA at the end of 2016 in the space where it was asked for and left it blank.  When I went back and put the figure in, my tax liability increased by almost $10k.  I don’t understand why the total remaining value of an IRA affects the current year’s tax liability.  The withdrawal amounts were already included in total income along with taxes withheld.  It seems that if I had never filed the 8606 forms in the past or had put the non-deductible contributions in a second IRA, I might have been better off.



Submitted by Alan - IRA critic on Fri, 2017-03-03 19:59

You still pay tax on 800 less than you would have.  But you will not recover the entire amount in your lifetime unless you totally drain the IRA. You might recover half or more, then your beneficiary would inherit the portion of the 25k that you did not recover and the beneficiary RMDs would continue to have a small taxable component until the IRA was totally drained. On the other hand, that 25k may be generating over 1k of gains in your IRA each year which are tax deferred. Therefore, there are pros and cons of making those contributions. You should have contributed to a Roth IRA instead if you were eligible but perhaps your income was too high for that. But it’s done now, so your 25k will continue to trickle out a little each year in proportion to the amount of your distribution.



Submitted by Carol Strong on Sat, 2017-03-04 16:21

I do understand the trickle effect of the $25k and its limited effect on my future taxes.  My question now though is, since I didn’t put in a total value for the IRA on any form 8606 from the beginning of filing 8606s (2011-2015), do I need to go back now and file amended income tax forms for each of those years (2011-2015) and update those form 8606s?  I used Turbo Tax each year to file my taxes and the question in the program was “What is the total value of your “Traditional” IRA”  My IRA account is listed as a “Rollover IRA” and I thought that I didn’t have a traditional IRA so I was suppose to leave it blank.  I think now that was in error.  Since I was only making contributions from 2011-2014, I’m not sure that listing the total value will change my tax liability and incur a bill for those years, that will remain to be seen; but, I guess it would correct the 8606 forms.  I’ve only looked at 2015 so far since it was the first year I took a distribution.  When I put the total value of the IRA in the TT tax program, it makes a HUGE difference in tax liability and I will owe additional taxes if I file an amended return.  That’s what I don’t understand.  If I had taxes withheld from the distribtution when it was made, why would I now owe additional taxes?  If i put that value in, It seems like I am being taxed on money still in the IRA that hasn’t even been withdrawn yet?  Can you explain to me what is actually happening when I put the total value of the remaining IRA in the form 8606?  I thought the government would only want to know that number when I turn 70 1/2 and they want to insure that I have actually taken the correct RMD.



Submitted by Alan - IRA critic on Sat, 2017-03-04 17:13

  • The IRS uses the gross distribution on the 1099R to determine if you have met the RMD requirement. It does not matter how much of the RMD is non taxable.  When you report the total year end value of additional non Roth IRAs, it dilutes the pro rate factor calculating the recovery of your non deductible contributions. For example, if 40% was non taxable before adding a rollover IRA worth 9 times the other IRA, the 40% drops to 4%. This process is often referred to as the “cream in the coffee” effect. Your non deductible contributions are the cream poured into the coffee and every cup of coffee contains an inseparable amount of cream. Now you add 9 times as much coffee to the pot and the strength of the cream is diluted by 90%.
  • You do not list the total value of your IRAs unless you took a distribution (including a conversion) in a year. Therefore, if you reported a total value for 2011-2014 you apparently filled in Box 6 of Form 8606 when you did not have to, and you can forget that as it does not affect your total basis from non deductible contributions. For 2015 you need to amend your return to correct the 8606 by changing the total value on line 6 and the rest of the math. And you need to complete that 8606 so that line 14 is correct because the line 14 total (amount of basis remaining) will carry over to line 2 of your 2016 8606. This does not mean you have to amend the 2015 return before you can file 2016, but you need to at least have mocked up the 8606 for 2015 before completing your 2016 return.
  • Finally, remember that Form 8606 only applies to one spouse and only holds one SSN. Therefore, the basis error only affects distributions from the IRA of that spouse, not the other spouse.


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