**When you take withdrawals **from your traditional IRA, you probably understand they’re taxable. But what does that really mean?

**Important: **Once you reach a certain age, you must start taking required minimum distributions from your traditional IRAs to avoid an expensive tax penalty. Previously, the required beginning date (RBD) was April 1 of the year after the year in which you turn 70 1/2. However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act pushed back the RBD to 72 for individuals who reach 70 1/2 after 2019. Contact your tax advisor for more information.

**Critical Starting Point**

To determine the federal income tax consequences of a withdrawal, first, figure out how many traditional IRAs you have. Remember to include:

- Any rollover IRAs set up to receive distributions from former employers’ retirement plans, and
- Any SEP-IRAs or SIMPLE-IRAs set up in your name.

If you have several traditional IRAs, you must add them together and treat them as one account to determine the tax consequences of taking withdrawals from any of them. However, if your spouse owns an IRA, it doesn’t affect how withdrawals from your IRAs are taxed.

**Important: **If you take any IRA withdrawals this year, you’ll receive a Form 1099-R from your IRA trustee or custodian in early 2022. If you don’t report the withdrawal(s), you’ll hear from the IRS, because a copy of any Form 1099-R gets sent to the tax agency, too.

**Taxpayers with Only One Traditional IRA**

When calculating how much of your withdrawal will be subject to federal income tax, there are two scenarios if you have only one IRA:

**1. No nondeductible contributions.**** **If you haven’t made any nondeductible contributions, all withdrawals are 100% taxable, and you must include them in your taxable income for the year you take them. If you take any withdrawals before age 59 1/2, they’ll be hit with a 10% penalty tax unless an exception applies.

*2. Some nondeductible contributions.** *If you’ve made some nondeductible contributions over the years, those amounts will create tax basis in your account, and each withdrawal from your traditional IRA will include some amount of basis. The amount is tax-free; the remainder is taxable. Taxable amounts are handled in the manner previously explained.

To calculate tax-free basis amounts and taxable amounts, you create a fraction. The numerator equals your cumulative nondeductible contributions as of the end of the year. The denominator equals your IRA balance on that date plus all withdrawals taken during the year.

Next, you must multiply your withdrawals by that fraction. The result is the amount of tax-free withdrawals of basis. The rest of your withdrawals are taxable.

For example, as of December 31, 2021, you’ve made $12,000 in nondeductible contributions to your traditional IRA. During 2021, you withdraw $20,000. On December 31, 2020, the account is worth $60,000.

The numerator of your fraction is $12,000. The denominator is $80,000 ($60,000 + $20,000). So, the tax-free basis portion of your 2021 distribution is $3,000 [($12,000/$80,000) times $20,000]. The remaining $17,000 ($20,000 minus $3,000) is taxable in 2021. If you’re under 59 1/2, you may also owe the 10% early withdrawal penalty tax.

**Taxpayers with Several Traditional IRAs**

The calculations become a little more complicated if you have more than one IRA. Again, there are two possible tax scenarios:

** 1. No nondeductible contributions. **If you haven’t made any nondeductible contributions, all withdrawals are 100% taxable, regardless of how many IRAs you have. And you must include the withdrawals in your taxable income for the year you take them. If you take any withdrawals before age 59 1/2, they’ll be hit with a 10% early withdrawal penalty tax unless an exception applies. Your tax advisor can tell you if you are eligible for any of the exceptions.

** 2. Some nondeductible contributions. **In this situation, you must create a fraction to calculate tax-free basis amounts and taxable amounts. The numerator equals your cumulative nondeductible contributions to all your IRAs as of the end of the year. The denominator equals the combined balances of all your IRAs on that date plus all withdrawals taken during the year.

Next, you must multiply your withdrawals by that fraction. The result is the amount of tax-free withdrawals of basis. The rest of your withdrawals are taxable.

For example, as of December 31, 2021, you’ve made $18,000 in nondeductible contributions to your two traditional IRAs. You also have a rollover IRA that was funded with a distribution from your former employer’s 401(k). During 2021, you withdraw $28,000. It doesn’t matter which account (or accounts) the money came from. On December 31, 2021, the three accounts are worth $272,000 combined.

The numerator of your fraction is $18,000. The denominator is $300,000 ($272,000 + $28,000). So, the tax-free basis portion of your 2021 distribution is $1,680 [($18,000/$300,000) times $28,000]. The remaining $26,320 ($28,000 minus $1,680) is taxable in 2021. If you’re under 59 1/2, you may also owe the 10% early withdrawal penalty tax.

**For More Information **

As you can see, the tax rules get complicated if you’ve made nondeductible contributions. Fortunately, you don’t have to file the required tax forms by yourself. Contact your tax advisor to help you understand how withdrawals from your traditional IRA will affect your tax situation and complete the necessary red tape.