Apparently they want the value of your IRA at the end of the year you take the withdrawal rather than at the beginning, in computing what fraction of a withdrawal is a return of already-taxed money.
Is there a reason for this?
It makes more sense to value the IRA on Dec 31 of the preceding year, it seems to me.
I'm just thinking out loud here - 12/31/11 , the account was $5K/$5K, you would like the withdrawal to be 50/50. But, say the account value fell by half, and you take out $5K. You'd want the benefit of the fact that $5K was pretax, right?
The flip side (I'm looking at both extremes) is +50%. The account is worth $15K, and the withdrawal is taxed on 66%, you've withdrawn $5K, and used up 1/3 of your post tax deposit.
I'm going to suggest that a large change can offer bad consequences if valued prior year, but year-end valuation avoids this, to a degree. Obviously, the value can drop below your post tax deposits, which would still create an issue.
I'm very slowly decompressing from a very hectic tax season, so pardon me for being late.
Ron, I assume you are the Ron of festoon() fame?
Actually both the 12/31/11 as well as the 12/31/12 values of the IRAs might be needed.
And be sure to include contributions (but not distributions) made through 3/15 of the next year in the year-end figures.
The 2011 figures are needed to compute and verify the RMD, if any.
The 2012 figures are needed to figure the Tax Basis of the IRA (the unrecovered pre-tax contributions.)
If there is any tax basis a form 8606 would need to be generated to compute the taxable portion of any distribution and also to recalculate the new tax basis.
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