I understand the concept of pro rata withdrawals from accounts with both pre- and post-tax contributions, but I have not been able to find a clear answer on how the % is determined. For example, assume I have only one retirement account that had a single pre-tax contributions of $30k 10 years ago that is now worth $90k and a single post-tax contribution of $30k from one year ago that is now worth $35k. The various sources I have read claim the calculation is one of the following:
1. Based on pre-tax contribution amount divided by total value of the account or 24% (i.e. $30k after-tax contributions divided by $125k current value of the account) - If this is correct it would seem like I am going to pay ordinary income rates on 76% of each withdrawal. That makes sense for all the pre-tax amount and its earnings, but if I had invested the $30k in an index fund outside of the IRA instead as a post-tax contribution to the IRA as I would get capital gains rates on the $5k gain .
2. Based on the current FMV - would be 75/25 with the 25% representing the $30k of value from the post-tax contribution and and $90k of value from the pre-tax contribution.
3. Based on the contribution amounts - would be a 50/50 split based on the contribution amount being the same for both pre- and post-tax contributions.
I have to think it is #1 as the second scenario does not account for time value of money and the pre-tax amount is disproportionally more valuable at the time of the distribution. That said, the record keeping associated with #1 would be difficult. I use Quicken and am pretty sure I would have difficulty segmenting pre and post-tax contributions that came from the same source at the same time. An example would be someone who contributes 50% of their deferral as pre-tax and 50% of their deferral as post-tax to their employer-sponsored 401k. Those would show as a single deposit into their accounts so would seem like you would have to have meticulous records of each asset purchase and if it came from pre or post tax? Imagine a scenario where you actively trade shares in your 401k creating even more complexity.
The TLDR is I am looking for clarity on how to determine the numerator for the pro rata calculation when a single IRA has both pre- and post-tax contributions and earnings and if I am going to paying ordinary income rates if the calculation is #1 above.
1. Based on pre-tax contribution amount divided by total value of the account or 24% (i.e. $30k after-tax contributions divided by $125k current value of the account) - If this is correct it would seem like I am going to pay ordinary income rates on 76% of each withdrawal. That makes sense for all the pre-tax amount and its earnings, but if I had invested the $30k in an index fund outside of the IRA instead as a post-tax contribution to the IRA as I would get capital gains rates on the $5k gain .
2. Based on the current FMV - would be 75/25 with the 25% representing the $30k of value from the post-tax contribution and and $90k of value from the pre-tax contribution.
3. Based on the contribution amounts - would be a 50/50 split based on the contribution amount being the same for both pre- and post-tax contributions.
I have to think it is #1 as the second scenario does not account for time value of money and the pre-tax amount is disproportionally more valuable at the time of the distribution. That said, the record keeping associated with #1 would be difficult. I use Quicken and am pretty sure I would have difficulty segmenting pre and post-tax contributions that came from the same source at the same time. An example would be someone who contributes 50% of their deferral as pre-tax and 50% of their deferral as post-tax to their employer-sponsored 401k. Those would show as a single deposit into their accounts so would seem like you would have to have meticulous records of each asset purchase and if it came from pre or post tax? Imagine a scenario where you actively trade shares in your 401k creating even more complexity.
The TLDR is I am looking for clarity on how to determine the numerator for the pro rata calculation when a single IRA has both pre- and post-tax contributions and earnings and if I am going to paying ordinary income rates if the calculation is #1 above.
Statistics: Posted by tomormatt — Tue May 07, 2024 9:28 pm — Replies 2 — Views 147