There are benefits to taking after-tax distributi♔ons from a retirement account. If you follow specific rules, the amount withdrawn will be free of taxes and penalties.

Pretax vs. After-Tax Contributions

Most retirement plan participants use pretax assets to fund their 澳洲幸运5官方开奖结果体彩网:employer-sponsored plans, such as 401(k) and 403(b) 澳洲幸运5官方开奖结果体彩网:qualified accounts, or they claim a 澳洲幸运5官方开奖结果体彩网:tax deduction for amounts contributed to their traditional 澳洲幸运5官方开奖结果体彩网:individual 𓃲retirement accounts (IRAs). In both cases, these contributions can help to reduce the individual’s taxable income for the year to which the contribution applies.

However, it is also possible to contribute amounts to employer-sponsored plans on an 澳洲幸运5官方开奖结果体彩网:after-tax basis, and contributions can be non-deductible for IRAs. The adva☂ntage of accumulating after-tax assets in a retirement account is that when they are distributed, the amounts will be tax and penalty-free. However, this benefit is realized only if the necessary ste༺ps are taken.

Tracking Your After-Tax Assets

Reaping the benefits of this strategy starts with good recordkeeping and clear communication with your plan administrator and the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS). Today, several free (and fee-based) software tools are available to help you keep track of your taxable and 澳洲幸运5官方开奖结果体彩网:tax-deferred investments and income flows. An accountant can also help you make sure you have all your ducks in a row.

Your Qualified Plan Account

The 澳洲幸运5官方开奖结果体彩网:administrator for your qualified retirement plan is responsible for keeping track of which portion of your balance is attributed to after-tax assets and which portion of your balance is attributed to pretax assets. However, it helps if you check your statements periodically to ensure ﷽that the tabulations match what you think they should be. This will allow you to clarify possible discrepancies with the plan administrator.

Your IRA

Your IRA 澳洲幸运5官方开奖结果体彩网:custodian is not required to keep track of the after-tax balance in your IRA, and most do not. As the owner of the IRA, you are responsible for keeping track of such balances, and this can be accomplished by filing IRS 澳洲幸运5官方开奖结果体彩网:Form 8606.

If you make a nondeductible contribution to your traditional IRA or roll over after-tax assets from your qualified plan account to your IRA, you must file IRS Form 8606 for the year the amount is contributed to the IRA. While the IRS does not currently require Form 8606 to be filed for rollover of after-tax amounts, it✨ may be a good idea to record such amounts for your records.

Form 8606 lets the IRS know that the amount represents after-tax assets, and it helps you keep track of the balance of your IRA that should be tax-free when distributed. 澳洲幸运5官方开奖结果体彩网:Form 8606 must also be filed for any year in which distributions occur from any of your traditional, SEP, or SIMPLE IRAs and you have accumulated after-tax amounts in any of these accounts.

Taxing After-Tax Assets

Qualified Plans

Generally, your plan administrator will indicate the taxable portion of amounts distributed from your qualified plan account on the 澳洲幸运5官方开奖结果体彩网:Form 1099-R that you receive for the year. If the amount is not properly indicated on the 1099-R, you may want to request written confirmation from the plan administrator of the portion of the distribution that is attributable to after-tax assets. This will help ensure you include the correct amount in your taxable income for the year.

IRAs

With the exception of “澳洲幸运5官方开奖结果体彩网:return of excess contributions,” your IRA custodian is not required to make a distinction between the taxable and nontaxable portion of amounts distributed from your traditional IRA. You must provide that information on your income tax return by indicating the entire amount of the distribution versus the amount that is taxable.

For more information, see the instructions for line 4a on page 1 of IRS 澳洲幸运5官方开奖结果体彩网:Form 1040. Form 8606 will help you determine the taxable and nontax👍able portions of am♉ounts distributed from your traditional IRA.

Pro-Rata Distributions

If your qualified plan or traditional IRA includes after-tax amounts, distributions usually include a pro-rata amount of your pretax and after-tax balance. For this purpose, all of your traditional♐, SEP, and SIMPLE IRಌAs are treated as one account.

For instance, assume that you made an average of $20,000 in after-tax contributions to your traditional IRA over the years, and your traditional IRA also includes pretax assets 🌱of $180,000, attributed to rollover of pretax assets and deductible contributions. Distributions from your IRA will include a pro-rata amount of pretax and after-tax assets. Let’s look at an example using these numbers.

Example

Jamie has several IRAs, which consist of the following𓂃 balances:🐻

1. Traditional IRA No. 1, which includes their nondeductible (after-tax) contributions of $20,000
2. Traditional IRA No. 2, which includes a rollover from their 澳洲幸运5官方开奖结果体彩网:401(k) plan in the amount of $150,000
3. Traditional IRA No. 3, which is a SEP IRA, including SEP contributions of $30,000

Jamie withdraws $20,000 from IRA No. 1. They must include $18,000 as taxable income from the $20,000 they withdrew. This is because all of Jamie’s traditional, SEP, and SIMPLE IRAs are treated as one IRA for the purposes of determining the tax treatment of distributions when Jamie has a basis (after-tax assets) in any𝓰 of their traditional, SEP, or SIMPLE IRAs.

The following formula can be used to determinꦐe the amount of a distributio👍n that will be treated as non-taxable:

Basis ÷ Account Balance x Distribution Amount = Amount Not Subject to Tax

Using the figures in the eꦿxample a𒉰bove, the formula would work as follows:

$20,000 ÷ $200,000 x $20,000 = $2,000

As IRS Form 8606 includes a built-in formula to determine the taxable amount of distributions from your traditional IRAs, you may not need to use this formula for distributions from your IRA.

For qualified plan accounts that include a balance of 🐼after-tax amounts, distributions are usually pro-rated to include amoꦐunts from pretax and after-tax balances. This means that, similar to IRAs, you can’t choose to distribute only your after-tax balance.

However, certain exceptions apply. For instance, if your account includes after-tax balances accrued before 1986, these amounts may be distributed in full, resulting in the entire amount being non-taxable, rather than being pro-rated.

After-Tax Balance Rollovers

If your retirement account balance includes after-tax amounts, whether 澳洲幸运5官方开奖结果体彩网:these amounts can be rolled over depends on the typ🔯e of plan to which the ro♚llover is being made.

The following is a summary of the rollover rules for these amounts:

• IRA to IRA: All 澳洲幸运5官方开奖结果体彩网:rollover-eligible amounts can be rolled over to an IRA. This includes after-tax amounts.
• IRA to Qualified Plan: All rollover-eligible amounts can be rolled over to a qualified plan, provided the plan allows it. However, this does not include after-tax amounts—such amounts cannot be rolled over from an IRA to a qualified plan.
• Qualified Plan to Traditional IRA: All rollover-eligible amounts can be rolled over to a traditional IRA. This includes after-tax amounts.
• Qualified Plan to Qualified Plan: All rollover-eligible amounts can be rolled over to another qualified plan, provided the plan allows it. This includes after-tax amounts if these amounts are transacted as 澳洲幸运5官方开奖结果体彩网:direct rollovers.

The Bottom Line

Bear in mind that this is just an overview of the rules that apply to your after-tax balance in your retirement account. Having a thorough understanding of the rules will ensure༺ that you include the right amount in your taxable income for the year you receive a distribution from your retirement account and not pay taxes on amounts that should be tax-free.

Consider consulting a tax professional for assistance to make sure your aft🃏er-tax assets are treated correctly on your tax return, and you know whiಌch tax forms to file each year.