RMD – Is it 100% taxable if some Contributions were Not Tax deductible?

Submitted by Kathy Kempton on Thu, 2020-09-24 16:08

IRA owner is now age 87. Originally taxes were paid on 100% of RMD, but then realized the error. Amended returns were filed to correct the over-payment of taxes. All of this information was provided to new CPA, who has been doing our taxes for several years and calculating what amount was NOT taxable. For 2019 tax returns (which must soon be filed) CPA did not calculate how much of the RMD was NOT taxable. When I questioned this I was told “it’s all used up.”

Since the IRA’s continue to grow every year, I was of the understanding that remembering to calculate the amount of the RMD that is not taxable was to be done every year (Or pay more tax than we actually needed to pay). I even thought Ed said this was something frequently overlooked (although it’s been several years since I’ve been to one of Ed’s classes) by beneficiaries of IRA’s and they potentially could pay taxes on 100% when actually, since some of the contributions were not tax deductible, the RMD or money coming out is not fully taxable.

Obviously we don’t want to pay taxes on 100% of his RMD, if not necessary since not all of the contributions to the IRA’s were tax deductible. Can this please be clarified, so it gets done correctly before taxes are filed, and for going forward in future years?

Thank you!



Submitted by Alan - IRA critic on Thu, 2020-09-24 18:18

The IRA owner must file a Form 8606 every year that they make a non deductible contribution. Every distribution including RMDs also require an 8606 to be completed that calculates the pro rata non taxable amount of the distribution. Once a CPA enters the 8606 info their tax program, the correct taxable amount is automatically calculated. What you were told is incorrect. The non taxable (IRA basis) never is used up unless there are huge losses in the IRA that wipes out the pre tax amount. That is unlikely. If the IRA value rises in a year, the basis % falls somewhat and vice versa. It really sounds like this CPA is not handling the 8606 correctly.  The tax program should do all the work and carry over from year to year.  But you said this was a NEW CPA?

Submitted by Kathy Kempton on Fri, 2020-09-25 18:28

Thank you for your response, which was what I recalled from all that I learned from attending Ed’s classes. I will be sharing your reply with my CPA who has done our returns for several years, but has now turned preparation of our tax returns over to an employee in her firm.  However, she is the one who tells me the basis is all used up.  Is there anything further I can/should tell her?   This IRA $ is in annuities.  What happens as account values DO decline?          AND, are you one of Ed’s “best of the best” elite advisors?Thank you very much!

Submitted by Alan - IRA critic on Fri, 2020-09-25 21:03

  • I am an unaffiliated taxpayer, not an advisor, who has been posting on this and similar sites for over 20 years.  When the CPA states that the basis is exhausted, that might have been true for some very old NQ annuities that are not in IRAs. When an annuity is in an IRA, the IRA rules always govern taxation of distributions, and the non qualified annuity rules do not apply whatsoever. Application of IRA basis always appears on Form 8606 for IRA distributions. Normally, the % of the distribution applied to basis (the non taxable portion) does not vary much from year to year. 
  • That said, HOW Form 8606 works with annuitized distributions like an SPIA, which has no account balance, has not been made clear by the IRS. Form 8606 requires a year end balance for all IRAs including IRA annuities. Are all of Dad’s IRAs in annuities, and how many of his annuities have been annuitized?

Submitted by David Mertz on Fri, 2020-09-25 21:57

It’s possible that since the IRS has never provided specific guidance on the calculations associated with basis in nondeductible traditional IRA contributions in combination with an annuity in payout status (annuitized) that on Form 8606 the CPA treated the IRA annuity has having a zero year end value.  In the absence of any other traditional IRAs of the individual, this would result in the basis being distributed first.  Even though the custodian might not provide a year-end FMV for an IRA annuity that is in payout status, I don’t agree with the idea that the year-end value is zero.  For example, for estate purposes there are several methods for valuating an annuity that does not end with the death of the annuitant, say, a joint-and-survivor annuity, so it seems to be that one of these methods should also be used to determine the year-end value of an IRA annuity that is in payout status.  Doing so would mean that basis would not be entirely consumed until the annuity terminated.

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