How to Calculate Taxable Income for IRA Distributions

by Mark Kennan

Knowing the taxable portion of your IRA distribution is vital to ensuring you pay the appropriate amount of income taxes when you file your return. In certain cases, calculating the taxable portion of the IRA distribution is very simple. For a qualified withdrawal from a Roth IRA, none of the distribution is taxable. For a distribution from a traditional IRA with no nondeductible contributions, the entire amount is taxable. Qualified withdrawals refer to distributions taken after age 59 1/2. Roth IRAs also require that the account has been open for five years. However, if you take a nonqualified withdrawal from your Roth IRA by tapping it before age 59 1/2, or if you made nondeductible contributions to your traditional IRA, the calculations are more complicated. A nondeductible contribution to a traditional IRA is a contribution you made but did not deduct on your income taxes.

Nonqualified Roth IRA Distributions

Add the value of all the contributions made to the Roth IRA. All Roth IRA contributions are made with after-tax dollars.

Total the amount of contributions withdrawn from your Roth IRA, if any. Taking withdrawals of contributions decreases the amount of after-tax dollars in your Roth IRA.

For example, if you put in $45,000 but had taken out $5,000, you have $40,000 in contributions remaining in your Roth IRA.

Subtract the amount of contributions remaining in your Roth IRA from your distribution total. If the total is less than zero, none of your distribution counts as taxable income. If your distribution exceeds the contributions in the account, you withdraw earnings, which are taxable. In this example, if you took out $50,000, subtract $40,000 from $50,000 to find that $10,000 of your distribution is taxable.

Traditional IRAs with Nondeductible Contributions

Add the value of all the nondeductible contributions made to the traditional IRA and subtract the value of any tax-free withdrawals taken from the traditional IRA to find the amount of nondeductible contributions remaining in the account. For example, if you put $23,000 of nondeductible contributions into your traditional IRA and have yet to take a distribution, you have $23,000 in nondeductible contributions.

Divide the nondeductible contributions in your account by the value of your IRA. In this example, if your IRA's total value equals $200,000, divide $23,000 by $200,000 to get 0.115.

Multiply the result by the size of your traditional IRA distribution to find the amount you must report as nontaxable income. In this example, if you take out $34,000, multiply $34,000 by 0.115 to find that $3,910 is nontaxable.

Take away the nontaxable portion from your total traditional IRA distribution to find the taxable income you have to report. Concluding the example, subtract $3,910 from $34,000 to find you have $30,090 in taxable income from the distribution.

Tip

  • If possible, take withdrawals that result in larger amounts of taxable income in years where you have less "other" taxable income so that you fall into a lower income tax bracket.

Warning

  • When you file your income taxes, you must report both the taxable and nontaxable portions of your distribution, even if the entire amount is not taxable, for IRS record-keeping purposes.

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