Jessica retired at age 65. On the date of her retirement, the balance in her traditional IRA was $219,000. Over the years, Jessica had made $21,900 of nondeductible contributions and $69,500 of deductible contributions to the account. If Jessica receives a $69,000 distribution from the IRA on the date of retirement, what amount of the distribution is taxable?

Question

Quizplus · Accepted Answer

To determine the taxable amount of the distribution, we need to use the pro-rata rule. This rule states that all distributions from a traditional IRA are considered to be a mix of pre-tax and after-tax (nondeductible) contributions, based on the proportion that each represents in the total balance of the account.

In this case, the total balance of the account at retirement was $219,000 + $21,900 = $240,900. The proportion of nondeductible contributions to the total balance is:

$21,900 ÷ $240,900 = 0.091 = 9.1%

Therefore, 9.1% of the distribution ($69,000) is considered to be a return of nondeductible contributions, and the remaining 90.9% is considered to be taxable as ordinary income. The taxable amount of the distribution is:

0.909 x $69,000 = $62,709

Rounded to the nearest hundred, the taxable amount is $62,100. Therefore, the correct answer is choice (D), $62,100.

Jessica Retired at Age 65