Jessica retired at age 65. On the date of her retirement, the balance in her traditional IRA was $206,000. Over the years, Jessica had made $20,600 of nondeductible contributions and $63,000 of deductible contributions to the account. If Jessica receives a $56,000 distribution from the IRA on the date of retirement, what amount of the distribution is taxable?

Question

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First, we need to calculate the total basis in Jessica's IRA. This is the sum of the nondeductible contributions she made ($20,600) and a portion of the deductible contributions based on the ratio of nondeductible to total contributions. In this case, the ratio is 20600/(20600+63000) = 0.246, so the portion of deductible contributions that are considered basis is 0.246 x 63000 = $15,498.

Therefore, the total basis in Jessica's IRA is $20,600 + $15,498 = $36,098.

Next, we need to calculate the taxable portion of the distribution. This is done using the pro-rata rule, which says that each distribution from an IRA is considered to contain a proportionate amount of taxable and nontaxable funds based on the ratio of total basis to total account balance. In this case, the ratio is 36098/206000 = 0.1757.

So, $56,000 x 0.1757 = $9,897.20 is the nontaxable portion of the distribution, and $56,000 - $9,897.20 = $46,102.80 is the taxable portion. However, Jessica may also owe income tax on the $46,102.80 depending on her tax bracket.

Jessica Retired at Age 65