It's important to record both pre-tax and after-tax contributions.
Q. I have two retirement accounts: one was pulled from my paycheck before taxes, so I know that I’ll pay taxes on when I use it. The other I’ve been contributing into for 20 years with money that has already been taxed. When it comes time for the minimum distribution, how are they taxed?A. It seems you’re saying you have a 401 that received pre-tax contributions and also an IRS that was funded with after-tax money.
It sounds like you have also been making contributions to a traditional IRA with after-tax money for 20 years. Since these contributions have already been taxed, when you take distributions from this account, they are considered partially return of after-tax contributions and partially return of growth, Hards said.via Form 8606 so that you have good records of how much of the account is made up of after-tax dollars, she said.
If, for example, your total IRA balance is $200,000 and your after-tax contributions are $20,000, you would divide $20,000 by $200,000 to come up with 10%. This means that 10% of all your distributions for the year will not be taxable, she said. Note that the money in a 401 plan does not count towards this balance. If it is rolled over into an IRA, then it would be included in the above calculation, she said.If you have multiple IRA accounts or 401 accounts, you are permitted to withdraw an RMD for an IRA from another IRA — but not an— but a taxpayer is not permitted to take RMDs required for one type of retirement account from another account.
“So, if you leave the money in a 401 and have an IRA, you will need to take two distinct RMD’s, one from each account,” Hards said. “If you roll over the 401 and combine the balance into one IRA, you can calculate the RMD on the total account balance and the tax implications would be pro-rata.”
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