As part of ThinkAdvisor’s Special Report, 21 Days of Tax Planning Advice for 201 4. throughout the month of March, we are partnering with our Summit Professional Networks sister service, Tax Facts Online , to take a deeper dive into certain tax planning issues in a convenient Q&A format.
How are amounts distributed from a traditional IRA taxed?
Distributions from a traditional IRA generally are taxed under IRC Section 72 (relating to the taxation of annuities). Under these rules, a portion of the distribution may be excludable from income. The amount excludable from the taxpayer’s income for a year is that portion of the distribution that bears the same
ratio to the amount received as the taxpayer’s investment in the contract (i.e. nondeductible contributions) bears to the expected return under the contract. In no case will the total amount excluded exceed the unrecovered investment in the contract.
All traditional IRAs are treated as one contract, all distributions during the year are treated as one distribution, and the value of the contract, income on the contract, and investment in the contract are computed as of the close of the calendar year with or within which the taxable year begins. Thus, the nontaxable portion of a distribution (whether from a traditional individual retirement annuity or account) is equal to the following: