If you have never made a nondeductible contribution to your traditional IRA, calculating the taxable portion of your traditional IRA distribution is very easy because the entire amount is taxable. A nondeductible contribution is money that you put into your traditional IRA without receiving an income tax deduction. You may choose to make a nondeductible contribution or you may have had to make one because you are covered by an employer plan and your modified adjusted gross income was too high. Only if you have nondeductible contributions in your traditional IRA will any part of the distribution be tax-free. However, if you have made nondeductible contributions, making sure you get credit for those when you take distributions from your traditional IRA can save you a significant amount on your income taxes.

1. Add the nondeductible contributions made to your traditional IRA over the years and subtract the value of any nontaxable distributions you have taken. For example, if you've put in $60,000 in nondeductible contributions but $6,000 of your distributions represent nondeductible contributions, you have $54,000 in nondeductible contributions in your account.

2. Divide the value of the nondeductible contributions by the value of the traditional IRA when you take the distribution to find the portion of your traditional IRA distribution that is tax-free. For this example, if the total value of your traditional IRA equals $270,000, divide $54,000 by $270,000 to get 0.2, meaning 20 percent of the distribution is tax-free.

3. Calculate the taxable portion of the traditional IRA distribution by subtracting the nontaxable portion from 100. In this example, subtract 20 from 100, which results in 80 percent of the distribution being taxable.

4. Multiply the taxable percentage of the distribution by the distribution amount to find the taxable portion. In this example, if you take an $8,000 distribution, multiply $8,000 by 0.8 to find that $6,400 of the distribution is taxable.

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