IRA Withdrawals and the Pro Rata Rule
Maybe you have an IRA, and you want to withdraw some cash for something fun (even though you know better). You will need to pay income tax on these IRA withdrawals but you may encounter a silver lining. You may have some money inside the IRA on which you have already paid taxes. This could have happened in years when you made an IRA contribution but were not eligible to deduct it (because your income exceeded the deduction threshold for that year). So you have already paid tax on that money. Or perhaps at some point you were involved in a company plan such as a 401k and had made after-tax contributions into that plan. When you left that employer, you rolled over the plan balance into your IRA. Those funds still retain their character as either pre-tax or after-tax money.
When you make IRA withdrawals and the IRA contains both pre-tax and after-tax money, the ?Pro Rata Rule? applies.
The Pro Rata rule requires that IRA withdrawals contain a proportionate amount of both the pre-tax and the after-tax amounts in the account. The after-tax amounts are called ?basis.? In an IRA, basis is the amount of nondeductible contributions made (or rolled over) to the IRA.
Case Study
Paula has $100,000 in an IRA, $20,000 is the basis (the total of her nondeductible contributions made over the years). She rolls over $200,000 from her former employer?s 401k plan to the IRA, of which $10,000 is from after-tax contributions. After the rollover, she?ll have $300,000 in her IRA. The basis becomes $30,000 (the $20,000 nondeductible plus the $10,000 of after-tax funds rolled into the IRA = $30,000 basis).
Now Paula wants an IRA withdrawal of $10,000. Of the $10,000, just $9,000 is subject to tax. The Pro Rata Rule requires each IRA withdrawal contain a proportionate amount of both taxable and nontaxable funds. Therefore, the nontaxable amount in the IRA is $30,000 and that is 10% of the total $300,000 IRA balance after the rollover. This means that each withdrawal will be 10% tax-free and 90% taxable.
Another option is to convert Paula?s entire $300,000 IRA to a Roth IRA. Then all withdrawals will be tax-free. However, she will have a one time large tax bill. She'll pay tax on $270,000; the $30,000 of basis will transfer tax-free to the Roth IRA. A partial conversion from a tradition to Roth IRA would require the use of the Pro Rata Rule.
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[...] which might be usually after tax in total normal profits charges. Next, we have the limitation on IRA-withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] can be typically after tax from whole ordinary revenue charges. Next, we have the limitation on IRA-withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] which might be usually after tax in total normal profits charges. Next, we have the limitation on IRA-withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] are typically subject to taxes with total normal revenue premiums. Next, we have the limitation on IRA-distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] the ones which are commonly taxed with total regular income prices. Next, we have the limitation on IRA distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] be commonly subject to taxes with total normal profits premiums. Next, we have the limitation on withdraw from IRA. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] type which can be usually taxed at complete normal revenue costs. Next, we have the limitation on Individual Retirement distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] that are normally after tax with whole ordinary profits prices. Next, we have the limitation on IRA-distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] the types which are usually taxed with full normal profits charges. Next, we have the limitation on IRA-distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] ones which are generally taxed on complete normal profits premiums. Next, we have the limitation on Individual Retirement withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] can be generally subject to taxes at total normal profits charges. Next, we have the limitation on Individual Retirement withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] are those which are commonly taxed on full ordinary profits rates. Next, we have the limitation on withdraw from IRA. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] be typically subject to taxes with total ordinary cash flow prices. Next, we have the limitation on IRA-withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] which have been typically taxed on whole regular earnings costs. Next, we have the limitation on Individual Retirement withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] that are commonly after tax with whole regular revenue premiums. Next, we have the limitation on IRA withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] that are normally after tax with whole ordinary profits prices. Next, we have the limitation on IRA-distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] are which are typically taxed from complete ordinary income prices. Next, we have the limitation on IRA-distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] types which are commonly taxed from total everyday revenue charges. Next, we have the limitation on IRA withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] type which can be usually taxed at complete normal revenue costs. Next, we have the limitation on Individual Retirement distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] types which are usually taxed from complete everyday profits rates. Next, we have the limitation on IRA distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] that are generally after tax on complete everyday profits charges. Next, we have the limitation on IRA-withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] been normally subject to taxes on total ordinary income prices. Next, we have the limitation on IRA-distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] are generally subject to taxes with whole regular income charges. Next, we have the limitation on Individual Retirement distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] that are normally after tax with whole ordinary profits prices. Next, we have the limitation on IRA-distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] might be generally subject to taxes at entire common income rates. Next, we have the limitation on IRA-withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] be commonly subject to taxes with entire everyday income charges. Next, we have the limitation on IRA-withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] which have been commonly after tax at whole normal income premiums. Next, we have the limitation on IRA-distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] be commonly subject to taxes with total normal profits premiums. Next, we have the limitation on withdraw from IRA. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] which can be typically after tax with total regular revenue rates. Next, we have the limitation on IRA-distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] be generally subject to taxes in whole regular earnings rates. Next, we have the limitation on IRA-withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] can be generally after tax from entire regular profits charges. Next, we have the limitation on IRA-distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] that are normally after tax with whole ordinary profits prices. Next, we have the limitation on IRA-distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] be generally subject to taxes in whole regular earnings rates. Next, we have the limitation on IRA-withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] which can be typically after tax on total everyday income prices. Next, we have the limitation on withdraw from IRA. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] can be typically after tax from whole ordinary revenue charges. Next, we have the limitation on IRA-withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] be generally subject to taxes from whole regular cash flow costs. Next, we have the limitation on withdraw from IRA. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] been commonly subject to taxes with whole regular revenue costs. Next, we have the limitation on IRA-withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] might be commonly after tax from whole normal earnings prices. Next, we have the limitation on withdraw from IRA. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] are normally subject to taxes in total everyday cash flow rates. Next, we have the limitation on withdraw from IRA. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] be generally subject to taxes in whole regular earnings rates. Next, we have the limitation on IRA-withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] ones which are normally taxed at entire everyday cash flow costs. Next, we have the limitation on Individual Retirement withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] have been typically after tax from total ordinary earnings charges. Next, we have the limitation on IRA-withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] been normally subject to taxes on total ordinary income prices. Next, we have the limitation on IRA-distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] type which can be usually taxed at complete normal revenue costs. Next, we have the limitation on Individual Retirement distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] which have been commonly after tax on total normal income rates. Next, we have the limitation on IRA-withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] can be generally subject to taxes at total normal profits charges. Next, we have the limitation on Individual Retirement withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] that are normally after tax with whole ordinary profits prices. Next, we have the limitation on IRA-distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] are which are typically taxed from complete ordinary income prices. Next, we have the limitation on IRA-distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] been generally subject to taxes from full ordinary income premiums. Next, we have the limitation on IRA withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] which are normally after tax from complete regular cash flow rates. Next, we have the limitation on IRA distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] been commonly subject to taxes on total ordinary revenue charges. Next, we have the limitation on IRA distribution. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] which are usually subject to taxes from full normal earnings rates. Next, we have the limitation on withdraw from IRA. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]
[...] be generally subject to taxes in whole regular earnings rates. Next, we have the limitation on IRA-withdrawal. While there are numerous exceptions, withdrawals prior to age 59 1/2 are subject to a 10% IRA [...]