Traditional IRA

How are IRA distributions from a Traditional IRA taxed when the Traditional IRA contains nondeductible IRA contributions?

If you make nondeductible IRA contributions to your Traditional IRA, or IRA rollover your after-tax IRA contributions from a retirement plan, IRA distributions will be partly or entirely tax free.

Upon IRA distribution, the part of the IRA withdrawal that is allocable to the nondeductible IRA contribution (basis) is tax free; the balance of the IRA distribution is taxable. IRS Form 8606 is used to compute this pro rata treatment.

Note: For purposes of this calculation, the value of all IRA accounts (except Roth IRA), including SEP IRA, SARSEP IRA and SIMPLE IRA, must be included, not just the account where the IRA distribution comes from. Therefore, there is no advantage in having separate IRA accounts for deductible and nondeductible contributions for the purpose of IRA distributions.

The IRA Distribution Worksheet, Figuring the Taxable Part of Your IRA Distribution, is from IRS Publication 590.

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