Back in (I think) 1981, legislation was passed in the US that allowed most folks to contribute $2000 per year on a tax-deductible basis to an IRA account. Since Mr. Middon and I were fortunate to have enough disposable income, we did this every year.
Then in 1986(?) the law was changed so that this was not available to most folks – if your income was above a certain level and you were covered by an employer-sponsored plan, your contributions could no longer be deducted on your taxes. However, any income earned on your after-tax contributions would be tax-deferred. Since we wanted to save for our eventual retirements, we took advantage of this and kept making contributions.
Also, over the years we’ve had a couple of instances where upon changing jobs we received profit sharing or similar dollars. The contributions to these accounts were tax-deferred (as of course were the earnings on the account). These we rolled over into an IRA account.
In hindsight, we should have kept separate IRA accounts to reflect the source of the contributions, but somehow over the years accounts were combined (and then split into separate accounts for investment purposes – but that’s a separate issue).
So now I have an account that includes the following:
[li]Tax-deferred contributions made in the early days, which of course are taxable upon withdrawal,[/li][li]Income on those tax-deferred contributions (again, taxable),[/li][li]Rollover from an employer-sponsored tax-deferred account (taxable),[/li][li]Income on rollover (taxable),[/li][li]After tax contributions (not taxable), and[/li][li]Income on after-tax contributions (taxable).[/li][/ul]
At first, I thought I’d have to dig deep in our records and follow each contribution through as if the different types were kept in separate accounts. But then it occurred to me that if I could determine the total of contributions made on an after-tax basis, I could just prorate the account.
So, for example, say that I have $200,00 in my IRA, $40,000 of which is after-tax contributions. If I wish to withdraw $20,000 from that account, can I just tell the IRS that $4000 of that distribution reflects post-tax contributions, so $16,000 of my withdrawal is taxable? Or will they demand that I get down to the nitty-gritty of what happened with each contribution?
We received a form from the relevant financial institution each year for that year’s contribution. I imagine the IRS also got a copy of that form.