I cannot understand taxes on my IRAs and need help.?

Question

I have eight traditional IRAs. Some were deductible when I invested, but I never added to them when the law was changed to make IRAs only deductible under certain gross incomes. They have sat for years, earning interest. Other traditional IRAs I have were non-deductible so were intitially and subsequently bought with post tax dollars, unlike the early ones. Then there is a Roth that is also all after tax dollars. Finally a 401 that the mutual fund just took money out and sent to me saying, it is the law that they do that even if I deduct from other IRAs.

Those last people said that I should consider ALL the different IRAs as one.

My questions: I must start taking distributions because I finally have reached that age. Must I pay tax on all the IRAs that I paid for with before tax dollars? Principal and interest? What about the ones with after tax dollars? And the Roth?

How do I prove that I already paid taxes on some of my IRAs? They were bought a long time ago.

Answer 1

I know that this is confusing, but the fact is that you cannot designate one traditional IRA account as deductible and another as nondeductible then take distributions from whichever account you choose in order to control the taxability of the distribution. You must consider ALL deposits into ALL of your traditional IRA's, determine your basis, and allocate that basis amont ALL of your traditional IRA balances. Since you have a basis in your traditional IRA's, EVERY withdrawal you make from ANY traditional IRA will be partially taxable.

You should know your basis in your IRA's because you should have been filing Forms 8606 with your tax returns for every year that you made a nondeductible contribution to a traditional IRA. You will also need to fill out this form every year that you take a distribution from a traditional IRA to calculate how much of the distribution is taxable.

Answer 2

Non deductible contributions to an IRA can be withdrawn without tax. You have to keep records of those deposits to substantiate the tax-free withdrawal. All other withdrawals from traditional IRAs are fully taxable.

Withdrawals from a Roth IRA are tax-free. Roth deposits are after tax dollars and the accumulations are tax-free as well.

All 401(k) withdrawals are fully taxable.