Have a Tax Question? Ask a Tax Expert
Under the IRS reporting requirements it is not possible to remove only the previously taxed portion of funds from an IRA. Each distribution is considered a prorata portion of taxed and untaxed monies. The calculation is done on Form 8606. The previously taxed portion (representing your after-tax rollover and any nondeductible IRA contributions you may have made) represents your IRA basis (line 2 on Form 8606). For example, if your IRA basis is $20,000 and the total value of all of your IRA accounts is $200,000 then only 10% ($20,000/$200,000) of your distribution would be tax-free.
The value of the stock on the date of the distribution would become your cost basis for determining your gain or loss when the stock is eventually sold.
So as I understand it even if I only pull out the after tax portion I would still have to pay ordinary income tax based on the ratio of aftertax contribution to the total of all IRA accounts.
I.e 20% aftertax portion of all IRA accounts. Any distributions would be 20% tax free 80% taxed as ordinary income. I cannot pull just the after tax money out.
Also, long term capital gains would not apply until 1 year after the transaction - even though I have held the stocks n the IRA over 1 year.
Does this also apply to a Roth rollover? Can I then transfer the entire IRA over to a Roth with 20% untaxed and the remainder taxed?
Am I correct?
Yes, that is correct that if you pull out an amount equal to after-tax portion only then you will be subject to income taxes (on the untaxed portion) based on the ratio calculated on Form 8606. The portion that is tax-free changes each year based on the amount of the basis that has already been recovered in prior years and the change in the value of the IRA account(s). Your holding period for the stock that is distributed begins on the day it is distributed from the account.
You could do a coversion of the entire IRA (including any other traditional IRAs that you may have) to a Roth IRA and you would only pay taxes on the portion that has not been taxed. To be eligible to convert your modified adjusted gross income must be less than $100,000.
It is still $100,000 for married filing jointly. However, in 2010 there is no limit for conversions so the $100,000 restriction will no longer apply.