Post tax IRA question….

[Coronita]

So… this question came up after a lunch conversation.

Suppose you have a IRA account that you contribute to with POST-TAX dollars.

For example, let’s say you contribute a total of $50k through decades with POST tax dollars to an IRA.

Let’s say that by the time you retire, your account has doubled to $100k (you have a capital gain of $50k).

Let’s say now you retired are withdraw from the IRA..

How are taxes computed?

1. Are you taxed via capital gains only on the $50k gain portion, while your $50k base is not taxed (since you already paid taxes on it)?

OR…

2. Does the IRS end up taxing you for the entire $100k as ordinary income (essentially double taxing the first $50k)?

Friends said it was #2. I found that hard to believe…. But just wanted to run it by people closer to retirement who might know…

[SK in CV]

What do you mean by a “post tax IRA”? A Roth IRA? Roth distributions, if all the requirements are met, are tax-free.

Distributions from non-deductible IRAs are partially tax-free. Essentially, you get “basis” in your IRA and the basis is recovered each distribution year based on the ratio of basis to total value at the beginning of the year.

[Coronita]

[quote=SK in CV]What do you mean by a “post tax IRA”? A Roth IRA? Roth distributions, if all the requirements are met, are tax-free.

Distributions from non-deductible IRAs are partially tax-free. Essentially, you get “basis” in your IRA and the basis is recovered each distribution year based on the ratio of basis to total value at the beginning of the year.[/quote]

By POST-TAX IRA I mean an IRA that you contribute to using after tax dollars that isn’t a ROTH (also I think called Non-deductible traditional IRAs) So I think it’s what you are referring two in your second paragraph..

And if so, that’s what I thought.

If you contributed to a non-deductible IRA, when it comes time to distribution each year, you aren’t taxed on portion of the withdraw that is

withdraw_amount_that_year * (total_contribution_you_made/total_account_value_for_that_year)

right?

———-

Second question… What if you were a bonehead and co-mingled IRA contributions using your after tax dollars into a Rollover IRA? Should people bite the bullet and separate it out or reverse it and keep Non-deductible IRA contributions in a distinct IRA account seperate from a Rollover IRA?

[SK in CV]

It’s all treated the same way. Though your IRA may be in multiple accounts, you essentially have 1 IRA. If some of the contributions were non-deductible, some were deductible, and some were from a roll-over, it’s taxed as if you have 1 IRA. So it’s non-deductible contributions (less previous non-taxable recovery)/value of all IRA’s at the beginning of the year to determine taxable portion of all IRA distributions. You can’t pick and choose when you recover the basis tax-free.

So as a practical matter, you can’t recover all the basis until you take a final IRA distribution.

[Coronita]

[quote=SK in CV]It’s all treated the same way. Though your IRA may be in multiple accounts, you essentially have 1 IRA. If some of the contributions were non-deductible, some were deductible, and some were from a roll-over, it’s taxed as if you have 1 IRA. So it’s non-deductible contributions (less previous non-taxable recovery)/value of all IRA’s at the beginning of the year to determine taxable portion of all IRA distributions. You can’t pick and choose when you recover the basis tax-free.

So as a practical matter, you can’t recover all the basis until you take a final IRA distribution.[/quote]

From a record keeping perspective, that’s what I was thinking to separate things…. But other than that, yes I know it’s computed over total…. Thanks…

[UCGal]

I know turbo tax handles this stuff. I would do a “what if” tax return as if you were starting to take withdrawals.

[joec]

I’d also add having worked in this area professionally, there is tons of wrong advice tossed among friends so if you were unsure of something, check from the source at irs.gov or another site I refer to is fairmark.com.

I’ve also seen cpas give wrong advice as well so check and double check if you aren’t sure. If you did it wrong, the IRS won’t care where you got the wrong advice.

[Author]

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