Traditional IRA Basis Question

[Bill the Butcher]

Originally Posted by jiminnm

The earnings are taxed when you make withdrawals. You will calculate a ratio based on pre-tax and post-tax contributions (and change your basis of each). I used to do the paperwork for my dad, who had an IRA consisting of both pre and post tax contributions. I think it was form 8606. I think you can withdraw your post-tax contributions any time with no tax consequences. If you do, all future withdrawals of the earnings will be taxable.

That's why a Roth is better for someone in your situation, any earnings are not taxed.

Thanks you. I read about the ratio as well. Calculating the ratio makes sense to me and seems easy enough. But I am still not understanding why the post tax earnings would be taxable. I would think you would only be taxed on the portion of the ratio that is the pre-tax earnings.

So if 95% of the contributions were post tax then every withdrawal that is made would be 95% tax free and only 5% of the withdrawal would be taxed. And when I use he term withdrawal here I am including both contributions and earnings.

I feel like we are going to have to open a new account or do a rollover to play it safe.

[Lowexpectations]

Originally Posted by Bill the Butcher

I see what you are you are saying. My 95% figure was with regards to just contributions and not the total balance of the account. But just going off of that website I quoted I would think the growth from the nondeductable IRA basis would be tax free.

The growth will be taxable when you withdraw it, the only think that is non taxable is the contributions

[Lowexpectations]

Originally Posted by Bill the Butcher

Thanks you. I read about the ratio as well. Calculating the ratio makes sense to me and seems easy enough. But I am still not understanding why the post tax earnings would be taxable. I would think you would only be taxed on the portion of the ratio that is the pre-tax earnings.

So if 95% of the contributions were post tax then every withdrawal that is made would be 95% tax free and only 5% of the withdrawal would be taxed. And when I use he term withdrawal here I am including both contributions and earnings.

I feel like we are going to have to open a new account or do a rollover to play it safe.

This is incorrect. You need to separate this into three buckets for a better visual

1. Deductible contributions
2. Non deductible contributions
3. Growth

Bucket 2 is tax free when you withdraw it and buckets 1&3 will count towards your taxable income

[1insider]

Correct me if I am wrong but wouldn't those non-deductible contributions offer better tax options if just put into a taxable account? Instead of regular income when withdrawn from the IRA, much of the withdrawals would fall into the capital gains category and there wouldn't be RMDs to complicate your future income management. Not sure about all this. Asking for a friend.