Inherited IRA-example

Inherited IRA Tax Basis - Example

An IRA owner has 3 IRAs:

One SEP IRA (account A)
- valued at $15,000,
one Traditional IRA (account B),
- consisting of only deductible contributions and earnings,
- valued at $200,000 and
one Traditional IRA (account C) with only non-deductible contributions
(no deductible contributions or earnings on the account),
- valued at $10,000.

If the IRA owner distributes $5,000 from account C, and if the IRA owner only looked at the source of the distribution and not the entire IRA picture, the distribution would seem to not be subject to tax.

However, the entire IRA picture does include deductible contributions and earnings, and, therefore, a portion of the distribution would be taxable.

Recall Formula:

Total of all Non-Deductible Contributions to all Traditional IRAs
____________________	X	Total distributions or conversions for the year	=	Non-taxable portion of the distribution or conversion
Year-end value of all Traditional and SIMPLE IRAs, plus any distributions or conversions during the year

Non Taxable Portion is:

$10,000
____________________	X	$5,000	=	$217.39
$225,000+$5,000=$230,000

Therefore, Taxable Portion is:

$5,000 - $217.39 = $4,782.61

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