Pro-rating Pre / Post Tax IRA withdrawals

[travelover]

OK, so I foolishly contributed about $14,000 post tax to my IRAs over the years. I have it captured on an 8606 form. I've withdrawn some IRA money and in anticipation for 2017 taxes I know that I need to calculate the ratio of pre to post tax contributions.

My question is, do I need to capture the relative values right now or do I base it on the end of the year value of the IRAs?

 

[audreyh1]

I also have a post tax IRA I contributed to in the 90s, which would be OK alone, but I rolled over my 401K into an IRA, so now I have to deal with this ratio crap.

So I am curious about the ratio answers.

 

[kaneohe]

F8606 is your friend and as Nords has said many times, it leads you by the hand thru the calculation so almost no thinking required. You will need your basis from your most recent 8606 and your 2017 yr end TIRA valuations
as well as any distributions you made.

Be sure to follow instructions on form and in the separate instructions esp if those on form tell you to see the separate instructions. You should have an separate intuitive feel for the correct answer to double check the end result.

I find it all too easy to make a careless error on these forms and end up in left field......my fault.....not IRS who generally does a pretty good job on the forms/instructions.

I would do a dry run using current valuations after you made the distribution just to get the feel of things.

In case you do QCDs, it is useful to know that all of it comes from deductible funds so you don't squander your basis on the QCD where it would be wasted. It is not intuitively obvious that this is true when you are filling out F8606 and it may not be true if you don't follow all the instructions (I learned this from Alan S. at fairmark.com).

 

[kaneohe]

I also have a post tax IRA I contributed to in the 90s, which would be OK alone,.............................................

I think you would have to deal w/ that ratio#*&@#$%^ stuff even with this
since you have earnings in addition to basis...........so no (further) harm done by rolling the 401K in. Same thing if you had other pre-tax IRAs.

Of course, if this post tax IRA is relatively small and you did not have other pre-tax IRAs, you could have withdrawn the whole thing, dealt with a one-time ratio thing, and then the next yr roll in the 401K. The next yr is important because if you had done the withdrawal first but rolled in the 401K the same yr, due to the yr end valuation detail, the ratio thing would have come into effect this yr and forever more.
An interesting exercise would be to do both versions on F8606.

 

[travelover]

But bottom line, do I calculate the total value of my IRAs when the withdrawal is made or at the end of the calendar year?

 

[2017ish]

But bottom line, do I calculate the total value of my IRAs when the withdrawal is made or at the end of the calendar year?

per line 6 of form 8606 (2016 tax year), looks like end of the calendar year: "Enter the value of all your traditional, SEP, and SIMPLE IRAs as of December 31, 2016, plus any outstanding rollovers (see instructions)."

 

[kaneohe]

You will need your basis from your most recent 8606 and your 2017 yr end TIRA valuations
as well as any distributions you made.

x

 

[kaneohe]

give a silent thanks to IRS every time you do your F8606. Imagine all the fun you'd have if you had to provide "current" valuation of all your TIRA holdings.
You only get valuations at month end. For some low activity accounts, I only get them quarterly. If you had to provide "current" valuations and you had multiple holdings of funds/stocks, gathering that info would be a real pain.
With year end valuation, take one number , maybe a few if you had multiple accounts.

 

[LOL!]

Bottom line: Does one read the instructions or does one just wing it?

 

[travelover]

Bottom line: Does one read the instructions or does one just wing it?

Reading the instructions and understanding the instructions can be two different things. That is why appreciate the good people here.

 

[audreyh1]

I think you would have to deal w/ that ratio#*&@#$%^ stuff even with this
since you have earnings in addition to basis...........so no (further) harm done by rolling the 401K in. Same thing if you had other pre-tax IRAs.

Of course, if this post tax IRA is relatively small and you did not have other pre-tax IRAs, you could have withdrawn the whole thing, dealt with a one-time ratio thing, and then the next yr roll in the 401K. The next yr is important because if you had done the withdrawal first but rolled in the 401K the same yr, due to the yr end valuation detail, the ratio thing would have come into effect this yr and forever more.
An interesting exercise would be to do both versions on F8606.

Good point! Yes, the post-tax IRA is almost 10x my original investment, so yeah, no further harm done.

 

[Alan]

I find that Turbotax (and I assume all the other tax software) leads you by the hand through this process, and prompts you for which year to use when totaling your year-end IRA's.

 

[travelover]

I find that Turbotax (and I assume all the other tax software) leads you by the hand through this process, and prompts you for which year to use when totaling your year-end IRA's.

Thanks, I've been using TaxAct for years and it seems to pull old information forward. I just want to be able to know if it seems to be using the right information.

 

[Alan]

Thanks, I've been using TaxAct for years and it seems to pull old information forward. I just want to be able to know if it seems to be using the right information.

I'm sure it does but I admit that I still look at the form 8606 it generates to be sure I understand what is happening, and I record in a spreadsheet the resulting ongoing basis on the 8606 to be carried forward to save me looking up last year's 8606 to double-check that the software has remembered correctly, so I fully understand your need to ask this question.

Soon I will have the joy of filing 4 tax returns every year, A joint return with the IRS, a joint return with the State of Louisiana, and 2 individual returns with HMRC

 

[audreyh1]

If your profit dominates, is it even worth filing the Form 8606?

I think that original post-tax investment represents about 1.8% of my current total IRA holdings.

Once you start drawing, you'll have to file this form forever? This is a serious consideration for me.

Who is going to do my taxes when I'm too old?

 

[Svensk Anga]

Once you start drawing, you'll have to file this form forever? This is a serious consideration for me.

You should file it until your IRA's are depleted. You could skip doing so if you don't mind paying taxes at your marginal rate on that money twice.

I got stuck in this trap from a year when we found out late that we made too much to contribute to Roth. Should have just undone the contributions. In my ignorance, I converted it to non-deductible traditional. I am too tight to let it go. Some of that basis will wind up in Roths, but when the 401k rolls to IRA, the remaining basis will get used up in tiny bites from there on out.

 

[2017ish]

If your profit dominates, is it even worth filing the Form 8606?

I think that original post-tax investment represents about 1.8% of my current total IRA holdings.

Once you start drawing, you'll have to file this form forever? This is a serious consideration for me.

Who is going to do my taxes when I'm too old?

Ours is roughly 0.5%. On one level, not worth doing. On the other hand, I still pick pennies up from the sidewalk...

(Given that I did it 2012 or 13 when we converted a nominal amount to establish our Roths, the software will make it very easy once we start serious conversions and withdrawals.)

 

[audreyh1]

You should file it until your IRA's are depleted. You could skip doing so if you don't mind paying taxes at your marginal rate on that money twice.

I got stuck in this trap from a year when we found out late that we made too much to contribute to Roth. Should have just undone the contributions. In my ignorance, I converted it to non-deductible traditional. I am too tight to let it go. Some of that basis will wind up in Roths, but when the 401k rolls to IRA, the remaining basis will get used up in tiny bites from there on out.

I don't expect to ever deplete my IRAs. That's the problem.

I'm thinking not worth doing, and I'm still 13 years away from RMDs.

 

[travelover]

If your profit dominates, is it even worth filing the Form 8606?

I think that original post-tax investment represents about 1.8% of my current total IRA holdings.

Once you start drawing, you'll have to file this form forever? This is a serious consideration for me.

Who is going to do my taxes when I'm too old?

This is a good point. The post tax portion of my IRA is probably about 1% of the total value.

 

[sengsational]

The thought of paying tax twice just gets to me! Unless your most recent 8606 is buried under mountain of rubble, why wouldn't you fill-out the dang form? It's not hard.

Many years ago, when I needed a total from my most recent 8606, and my most recent 8606 was in a random, unlabeled box in the attic, I went hunting. I didn't know whether to trust the carry forward details in the tax software. The total was right, but now I have a little spreadsheet that serves as suspenders.

 

[kaneohe]

If your profit dominates, is it even worth filing the Form 8606?

I think that original post-tax investment represents about 1.8% of my current total IRA holdings.

Once you start drawing, you'll have to file this form forever? This is a serious consideration for me.

Who is going to do my taxes when I'm too old?

audrey.......you should at least do 1 withdrawal/F8606 before you shun it.
Might take 5-10 minutes to do the form , perhaps less if you use tax software.
Rather than thinking about the basis as a % of total holdings, I would think about it as some number of $$. RMD is about 4% of TIRA value . If your marginal tax rate is 25%, then the tax savings is 1% * 1.8% of TIRA value.
You can then compare that with the number of pennies you would pick up from the sidewalk or perhaps calculate your wages per hr doing this.

And be sure to make the 8606s available to your heirs so they can also have fun doing this.

 

[audreyh1]

I have the 8606s from way back in the 90s. It's the dealing with filing this year after year until I die that gets to me. And on to my heirs too! Yech!

 

[Trooper]

What if I made post-tax contributions in the 90s but no longer have the 8606s? Like Audrey it's a small piece of the pie...

 

[kaneohe]

For those who have an aversion F8606, here's a slimmed down version of what
one might look like......basically just 8 lines if you are just making withdrawals
(no conversions):

Lines 2,3,5: Total basis in TIRAs (from prior F8606) e.g. 10K
Line 6: Value of all TIRAs at yr end: 480K
Line 7: Distributions from TIRA: 20K
Line 9: Line 6 + Line 7: 500K (approximates total value before distribution)
Line 10: Line 5/line 9 (approximates fraction that is basis): 0.02
Line 12,13: Line 7 x Line 10 (basis included in distribution): 0.4K
Line 14: Line 3 - Line 13: 9.6 remaining basis
Line 15: Line 7 - Line 12: 19.6K taxable amount of distribution

In this case you are saving taxes on the $400 basis......$100 if in the 25% bracket or $60 in the 15% bracket. You can decide if doing 8 lines is worth the trouble.

 

[audreyh1]

Well I do have to solve the problem of who will do my taxes when I get too old....