Most people make deductible contributions to their traditional IRA and the entire amount of their distributions count as taxable income. However, if you make nondeductible contributions, those nondeductible contributions come out tax free. When you take a distribution, you have to calculate the portion of your distribution that comes from the nondeductible contributions so that you do not pay more tax than you have to when you file your return.
1. Figure the nondeductible contributions in your IRA by adding any nondeductible contributions made over the years. Then subtract any nondeductible contributions removed from the account, if any. For example, if you put in $24,000 in nondeductible contributions and have yet to take any distributions, you have $24,000 of nondeductible contributions in your IRA.
2. Divide your nondeductible contribution value by your IRA's total value. In this example, if your IRA's value equals $98,000, divide $24,000 by $98,000 to get 0.245.
3. Multiply the result by the size of your IRA distribution to find the nondeductible portion of your IRA distribution. In this example, if you took a $19,950 distribution, multiply $19,950 by 0.245 find that $4,887.75 of the distribution is from nondeductible contributions, and is therefore not taxable.
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