How to Calculate Taxable Income From a Pretax IRA

by Mark Kennan

A pretax individual retirement account (IRA) refers to one of several types of IRAs that allows the contributer to put money into the account and claim a deduction for the contribution. Examples of pretax IRAs include traditional IRAs,simplified employee pension (SEP) IRAs and savings incentive match plans for employees (SIMPLE) IRAs. Unless you did not deduct contributions that you made to a pretax IRA, your entire distribution counts as taxable income. However, knowing how to calculate your taxable income if you did make nondeductible contributions helps you save money on your taxes.

Compute the total nondeductible contributions made to your traditional IRA, then subtract any nondeductible contributions taken out of the account. For example, if you made $53,000 of nondeductible contributions to your IRA, but took out $8,000 in prior distributions, you have $45,000 of nondeductible contributions remaining in your pretax IRA. If you have no nondeductible contributions in your pretax IRA, your entire distribution counts as taxable income.

Divide the nondeductible contributions in your pretax IRA by the value of your pretax IRA at the time you take your withdrawal. For this example, if you took your withdrawal when your pretax IRA had a value of $370,000, divide $45,000 by $370,000 to get 0.1216216216216216.

Multiply the result by the amount of your withdrawal to calculate the nontaxable income resulting from your pretax IRA distribution. In this example, if you took out $15,000, multiply $15,000 by 0.1216216216216216 to find your nontaxable income equals $1,824.32.

Subtract the nontaxable income from your pretax IRA distribution to find the taxable income resulting from your pretax IRA distribution. In this example, subtract $1,824.32 from the total distribution from $15,000 to find the taxable income equals $13,175.68.

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