I have a question regarding processing Form 1099-R (distributions from IRAs). My contributions were all POST-tax. The 1099-R that I received from the mutual fund shows all of this amount as "taxable amount" (box 2a). They also withheld 10% of the distributed amount for federal tax. It seems to me only the capital gains from this should be taxed. Is that what I should report in box 2a? Thanks!
Hi, Ravi! First, an important question: was this a Roth IRA or Traditional IRA? If it's a Roth IRA, and you meet the requirements (account at least 5 years old and you at least 59½ years old), then the entire distribution is tax free.
Since your mutual fund listed a taxable amount, it looks like this was a Traditional IRA. In that case, not just capital gains, but _all_ gains, are taxable, in addition to the amount of PRE-tax contributions if any. (You have told us that the latter is zero in your case.) For instance, any dividends would also be gains, and thus taxable. Whether the gains are capital gains, dividends, or anything else doesn't matter: the taxable gains are all taxed as ordinary income.
In rough terms, you take the ratio of your basis(*) in your IRA to the total value of your IRA, and the non-taxable portion of your distribution is that ratio times the amount of the distribution.
(*)Your basis will be found on your latest form 8606.
The bible for this is Publication 590-B:
Specifically, here's how to compute the taxable and nontaxable amounts of your distribution:
But Pub. 590-B is dated 2020, and the year numbers can be confusing. The latest form 8606 and instructions are here and may be easier to follow:
Do you use software to file your taxes? I'd expect pretty much any software would handle form 8606, which is where these computations are done.
Download the 2021 edition of Publication 590-B from the following link. "Figuring the Nontaxable and Taxable Amounts" is on page 16.
Thank you, Stan. This is very helpful. I have a better grasp of it now thanks to your email. Yes, my IRA is traditional. I'm sure I will have more questions as I go along.
Thank you, Bob. Just downloaded 590-B.
The wording is somewhat confusing. What most people consider a "Post-Tax" contribution is one that you did not deduct from your income before figuring your tax. A "traditional IRA" is one where you deduct the amount you contribute.
There are some cases where employers sponsor post-tax retirement plans. In these cases the contributions are not deductible and you do not pay tax on the annual income in the account, but when you withdraw the money some portion of it is taxed.
It would help if you were clearer about what the structure of the plan in question is.
Not quite. A traditional IRA can be post-tax or pre-tax or a combination of the two.
Ira Smilovitz, EA Leonia, NJ
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