Max retired in 2017 at age 62.During the year he received distributions of $12,000 from his IRA.He made nondeductible contributions of $30,000 to the IRA in prior years and has never received a nontaxable distribution.As of December 31,2017,the value of his IRA was $250,000.Calculate the nontaxable portion of Max's distribution.

Question

Quizplus · Accepted Answer

To calculate the nontaxable portion of Max's distribution, we need to use the IRA basis recovery formula. This formula is as follows:

Nontaxable portion of distribution = (Nontaxable contributions ÷ IRA balance) × Distribution amount

In this case, Max's nontaxable contributions are $30,000, and his IRA balance is $250,000. So:

Nontaxable portion of distribution = ($30,000 ÷ $250,000) × $12,000 = $1,440

However, we need to take into account the pro-rata rule, which states that any distribution from an IRA is considered to be a proportionate mix of taxable and nontaxable funds. In other words, the nontaxable portion of the distribution is calculated based on the ratio of nontaxable contributions to the total balance of all IRAs in Max's name.

Assuming that Max has no other IRAs, we can calculate the total balance of all his IRAs at the end of 2017 as follows:

Total IRA balance = Value of IRA – Distribution amount + Nondeductible contributions
Total IRA balance = $250,000 - $12,000 + $30,000 = $268,000

Now we can apply the IRA basis recovery formula:

Nontaxable portion of distribution = (Nontaxable contributions ÷ Total IRA balance) × Distribution amount

Nontaxable portion of distribution = ($30,000 ÷ $268,000) × $12,000 = $1,374

Therefore, the correct answer is A) $1,374.

Max Retired in 2017 at Age 62