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Greetings, Jmclbc, and welcome. You wrote:

<<I know that there is no legal proscription against mixing deductible IRA contributions with non-deductible contributions in the same IRA account, but I do no understand how the withdrawal procedure works in such instances for determining whether taxes are owed or not on the contribution amounts. Does mixing the contribution types create a record keeping nightmare when it comes time for withdrawals because taxes will be owed on some of the contributions but not on others? Is the record keeping problem solved by simply investing the different type of contributions into different funds or stocks so when you liquidate one security for withdrawals you'll know what type of contributions went into it originally? If a person is liquidating two investments in preparation for a withdrawals, one funded by deductible contributions and the other by non-deductible contributions, with the cash from the sale going into the same money market fund, is there some rule regarding whether the deductible or non-deductible contributions come out first? Any insight into this would be appreciated so I'll know whether I should mix our deductible and non-deductible contributions or keep them separate as is currently the case. Thank you. >>

You will find the procedures for withdrawals and accounting for the taxable portion of those withdrawals in IRS Publication 590 (Individual Retirement Arrangements) available at Bear in mind the problem exists only with traditional IRA, not the Roth. Basically, you will be taxed on any part of a withdrawal taken from any traditional IRA even when you have set up two or more, one to receive fully deductible contributions and the other(s) to receive nondeductible contributions. That's because when looking at withdrawals from traditional IRA you must look at all of them as one giant IRA.

Example: You have two, one consisting of deductible contributions and the other nondeductible contributions. You put $5K into each and both are now worth $10K each. You want to take $5K from the nondeductible IRA. In simple terms, the IRS says you must total the value of all your traditional IRA ($10K times 2 equals $20K). Divide the total of your nondeductible contributions through the years by the total market value ($5K divided by $20K equals 0.25). Multiply the result (0.25) by your withdrawal ($5k) to get the amount of the withdrawal on which you will not pay tax ($1,250). The rest of the withdrawal gets taxed ($5,000 minus $1,250 equals $3,750). Next year you would repeat the process except in that year you would have only $3,750 nondeductible contributions left in all your traditional IRAs.

Like the nondeductible contributions you made through the years, the withdrawals of that money are reported on Form 8606 to be filed with your income tax return each year.

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