Question about Tax Basis For IRA Withdrawal?

Question

I don't throughly understand what the basis would be.
This is what I think, a person has $8000 in their account and they want to withdrawl it all.
If $5000 was invested (and wrote off prior) Then $3000 would be the basis (8000-5000=interest earned)
Early penalty is not in issue because of the 591/2 year rule.
So is this correct? If not please explain. Thanks!

Yes, it is a traditional. And I was afraid since the principal was wrote off it was a 0 basis.
So do I owe F.I.C.A. since it's unearned income?

Answer 1

The basis is the total of any "non-deductable" contributions that were made. If all of the previous contributions were deducted on prior year's returns, the basis would be $0.00.
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No you will not owe FICA on this distribution but, if you are under age 59 1/2, you will owe a 10% penalty.

Answer 2

There is no "basis" for an IRA. All of the withdrawals are fully taxable as ordinary income.

The only exception to that is if you had any contributions that you were unable to take a deduction for such as if you were already covered by a pension plan at your work and made too much money to get the deduction for IRA contributions.

You do not pay SS or Med tax on IRA distributions. The contributions were taxed going in (they're not exempt from SS and Med tax) and the gains are unearned income which is not subject to SS or Med tax.

Answer 3

If it is a traditional IRA, you will pay tax on every dime you take out of the IRA,, the original investment and the earnings.

The original investment was never taxed and will be taxed when you take the money out.

the earnings in the IRA account have never been taxed and will be when taken out of the IRA.

Answer 4

As others have noted, all of the distribution is taxable (the basis is zero).

However, no Social Security or Medicare taxes are due on this distribution.