Save time with our cheat sheets, fact sheets, checklists & books!

February 17, 2011

Will distribution from IRA Contribution be taxed?


Will distribution from IRA Contribution be taxed?

Question I just put $6,000 in a traditional IRA CD as a contribution. These were funds previously taxed. When I withdraw distribute) these funds will they be taxed again?


SHORT ANSWER: When you withdraw this $6,000, it will not be taxed unless you take a tax deduction for it on your tax return.

I am expanding my response to include some information that you may already know, but could be of benefit to others who are unfamiliar with how IRAs work.

A traditional IRA is funded with funds that have already been taxed. However, if you are eligible, you can take a tax deduction for the contribution amount, which in effect, makes it ‘pre-tax’ dollars. To determine if you are eligible to take a deduction for your contribution, see the article: Active Participant Status–Can You Deduct Your IRA Contribution?

If you take a tax deduction for your contribution, the amount is taxed when it is withdrawn from your traditional IRA.

If you do not take a tax deduction for your contribution, the amount is considered a nondeductible contribution and is not taxed when withdrawn from your traditional IRA: CAUTION HERE!!!!!!!!!!

• CAUTION #1: Remind your tax preparer to file IRS Form 8606 to report this contribution as nondeductible, so that the IRS knows it should not be taxed when withdrawn from your traditional IRA. Form 8606 must also be filed for any year that you take a distribution ( if you made a nondeductible contribution to your traditional IRA)
• CAUTION #2: Distributions of the earnings on those contributions are taxable
• CAUTION # 3: If you have other traditional IRAs, SEP IRA and/or SIMPLE IRAs, any distribution from any of your traditional IRA, SEP IRA and/or SIMPLE IRA will include a prorated amount of your pre-tax and after-tax balance. For example, assume that you have other traditional IRA, SEP IRA and/or or SIMPLE IRA balances totaling $10,000, all of which is pre-tax. Your total balances for all of your traditional, SEP and SIMPLE IRAs would now be $16,000- which comprises of 37.5% after-tax amounts and 62.5% pre-tax. Assume too that you take a distribution of $6,000 from this IRA CD. Under the IRA rules/regulations, the $6,000 will include $2,250 after-tax (nontaxable) amount and $3,750 pre-tax (taxable) amount.

Answer provided by Appleby Retirement Consulting Inc. Appleby Retirement Consulting Inc provides Consulting, Coaching and Content on IRAs and other retirement plans to Financial, Tax and Legal professionals.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.


Keep Learning

Individual Retirement Arrangement (IRA)

Definition Individual retirement arrangement (IRA) is an umbrella term that covers individual retirement account and individual retirement annuity. These are retirement savings vehicles established by

Partial Recharacterization

Definition A recharacterization of less than the account balance (from which the contribution or conversion is being recharacterized), or less than the total (traditional or

HSA Funding Distribution (HFD)

Definition A qualified HSA funding distribution (QHFD) is a distribution from a traditional IRA or a Roth IRA , that is made to the individual’s Health

Be among the first to know when

IRA Rules