For purposes of this question, assume the following:
My wife has two traditional IRA accounts. One is worth $100,000 and the other is worth $10,000.
I have four traditional IRA accounts; total value is $90,000. I also have a 401k.
Over the years, in the course of making contributions to my wife’s larger IRA account, a total of $20,000 was contributed after taxes; in other words, $20k was not deductible. Our IRA basis is thus $20,000.00 (Tax forms have been saved for proof of these contributions.)
I want to start taking distributions from our IRA accounts before the end of the year, and I was going to start these distributions from my wife’s larger account. I had originally planned to take the distribution from this account over a 2-year period, half ($50k) this year and the remainder next year. I thought that our taxable income from these distributions would thus be $40k this year (distribution less half of the basis) and approximately the same next year, depending on how the account performs next year. These two distributions would then use all of the non-deductible contributions and would put the IRA basis at zero.
But I’m not sure how the non-deductible contributions figure in the calculation of taxable income. I thought I did, but after reading the instructions for Form 8606, I’m definitely confused. Here’s a link to the instructions:
https://www.irs.gov/pub/irs-pdf/i8606.pdf.
I know that on Line 2 of the form 8606 “Enter your total basis in traditional IRAs” I should enter 20,000.00, which is the total amount of non-deductible contributions over the years. But Line 6 is where I get confused: “Enter the total value of all your traditional, SEP, and SIMPLE IRAs as of December 31…” Do I enter the total value of the IRAs for both my wife and me? Or, because my wife will technically be taking the distribution, do I enter the total of her IRAs? Or do I enter just the value of the account from which she took the distribution? And does the value of my 401k figure into the equation? Obviously, this figure is crucial for determining the taxable value of the distribution, so I need to get it right.
If I have to enter the total value of all IRAs, then it seems to me that it would make no difference from which IRA account we take a distribution, as the basis would be the same across all accounts. Thus, I wouldn’t necessarily have to take a distribution from the account where the taxable contributions were made, but I can still use the basis.
I hope I’ve explained this well enough so that someone can give me the information that I need. But if not, I’ll try to explain further if needed.
TIA!