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Taxes on IRA's
Old 05-22-2012, 02:51 PM   #1
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Taxes on IRA's

I have a couple of quick questions about taxes on IRA withdrawals. Neither my wife nor I have a lot in of money in IRAs but I am running a few projections on how I can put my arms around a fairly large chunk of cash with the last tax hit.

Each of our IRAs are spread across a Traditional IRA, a Rollover IRA (from our 401K/403B accounts) and a Roth. The Roths are very small. Of the total amount in each of our IRAs, about 10% represents contributions made with post-tax money; all the rest is pre-tax. My understanding is that when you withdraw from your IRA, regardless of how many individual accounts you have, it is all considered one big IRA for computing taxes due on them. (In other words I can't just try to take a tax-free withdrawal from that I amount that I contributed post-tax.) So if I am correct on that, my questions:
- Does the Roth count in those computations or can I just withdraw tax-free from the Roth without regard to the other IRAs?
- For the non-Roth portion, would I be paying taxes on 90% of the withdawal (because taxes have already been paid on 10% of the money)? I assume the IRS has a form for all this.
- My wife and I file jointly; I assume that it makes no difference whether the withdrawals are from her IRA or mine as either will show up as joint income on the tax return. Or is there something here I'm missing?

Thanks in advance for any responses.
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Old 05-22-2012, 03:17 PM   #2
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When I did the retirement rollover (401(k) to rollover IRA), I was notified of the pre-tax contributions (tracked through FIDO) over many years, and had the option to either move that non-taxable amount to a taxable account or have a check sent to me.

The remaining contributions, along with earnings accumulated over many years, stayed in the tax-deferred rollover IRA. There was no combining of "contribution types". You may want to check with whomever you did/will do the rollover with to see if you have the same option..

As far as Roths? Yes, they are non-taxable (contributions and earnings) assuming you have met the 5-year rule: What is the five-year waiting rule for Roth IRAs? and not co-mingled. You may have heard somthing related to RMD's at age 70.5, but that computation does not apply to Roth's and in the case of a married couple, computed separately for you and your DW, based upon your respective ages and the total value of your Traditional and Rollover IRA's each year, for each of you.

And yes - assuming you file jointly, it does not matter from who's account the withdrawls are made on tax-deferred IRA's. In our case, both being retired and pre-SS/pension, we both do monthly withdrawls to support our joint budget. No different than when we were wo*king and each had a paycheck rather than an IRA for income.

One last thing (if it applies to you). If you made non-deductable IRA contributions (usually due to being "above the line" on salary), the excess contributions should have been reported on the tax year IRS Form 8606. This also applies to the period of 1987 through 1997 when non-deductable IRA's were in vogue. This is a situation where contribution types are co-mingled (before/after contributions) and easily handled computing manually against your last 8606 (shows accumulated contributions over the years) or taken care of by TurboTax (or any other tax software, I assume) which will carryover the necessary basis record to track remaining tax credits.
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Old 05-22-2012, 03:40 PM   #3
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the 5 year rule only applies if you are making a qualified distribution or a non-qualified distribution from a rollover IRA or conversion. If it was a straight roth contribution (no conversion) the 5 year does not apply. Roth ordering rules do, however, and the first money out is the roth contirubtions, followed by rollover/conversions (5 year must be met) and then earnings (sort of a simplified version).

I don't know the OP's situation, but the roth contributions will not be taxed or subject to penalty.
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Old 05-22-2012, 03:55 PM   #4
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Quote:
Originally Posted by ronocnikral View Post
If it was a straight roth contribution (no conversion) the 5 year does not apply.
To restate it, the original contribution can be withdrawn, but the earnings are still subject to the 5-year rule.

However as you said, we don't know the detail on the OP's Roth "history"...
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Old 05-22-2012, 04:02 PM   #5
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Quote:
Originally Posted by friar1610 View Post

- Does the Roth count in those computations or can I just withdraw tax-free from the Roth without regard to the other IRAs?
- For the non-Roth portion, would I be paying taxes on 90% of the withdawal (because taxes have already been paid on 10% of the money)? I assume the IRS has a form for all this.
- My wife and I file jointly; I assume that it makes no difference whether the withdrawals are from her IRA or mine as either will show up as joint income on the tax return. Or is there something here I'm missing?

Thanks in advance for any responses.
1) The Roth does not count in those computations. Only TIRAs are aggregated together for the calculation. For the Roth, contributions can be withdrawn at any time tax and penalty-free. Conversions, as mentioned previously , are subject to a 5 yr clock and earnings are subject to an age clock as well as another 5 yr clock and the details can be a little confusing. More details can be provided if you are interested.
2) for the TIRAs (non-Roth) basically what you say is true. The actual amount is calculated using Form 8606 using the basis (non-deductible) contributions provided previously.
3) As mentioned previously, you have a separate 8606 from spouse so the actual details depend on who, if anyone, has a different proportion of non-deductible contributions in their TIRA.
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Old 05-22-2012, 06:36 PM   #6
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Originally Posted by kaneohe View Post
3) As mentioned previously, you have a separate 8606 from spouse so the actual details depend on who, if anyone, has a different proportion of non-deductible contributions in their TIRA.
+1 on this.

The year I ER'ed I had a tIRA with a large after-tax % and a 401k with zero after tax money.

DW had IRA's that in total had a small after tax % since she had rolled her 401k into an IRA several years earlier.

That year, I converted my tIRA to a ROTH since neither my 401k or DW's IRA's were included in the calculation on form 8606.

The following year I rolled over my 401k, and we now do ROTH conversions from DW's IRA's each year since the calculation on the 8606 does not include my IRA.
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Old 05-22-2012, 07:18 PM   #7
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I always avoided the dreadful taxed portion of any distribution from 401k's. By taking it in cash, but rolling the deferred into a tIRA. The taxed part never seemed to amount to much, and I figured it would just muddy the pool later.
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Old 05-22-2012, 10:44 PM   #8
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If you can withdraw/Roth convert from the TIRA's up to the current 15% tax bracket and fill in the rest of your needs with Roth/taxable accounts you'll be getting the lowest tax rate possible on your IRA withdrawals.
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Old 05-23-2012, 02:22 PM   #9
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Thanks very much for all the helpful responses.
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