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The way it works is that you pay ordinary rates in affect at the time of the distribution. There are no capital gains. If 100% of your contributions were deductible then 100% of your distributions are taxable. If Some of your contributions were not deductible then what the IRS says is that you pay taxes in proportion to the amount that was deductible to the total value of the ALL of your IRAs.

Example: Let's suppose you have 2 IRAs each worth $10,000. let's suppose IRA A was originally funded with fully deductible contributions of $4000. Suppose IRA B was originally funded with $2000 of non deductible contributions and $2000 of deductible contributions. there is $6000 gain on both IRA's.

Suppose now you take $5000 out of IRA A.:

The total value of all your IRA's is$20000=x. The non-deductibel part of IRA B is $2000=y

You pay taxes on $5000X(x-y)/x=$5000X0.90=$4500.

In simple terms your IRA's are worth $20,000 and your non deductible contributions are $2000 (10%) so you pay taxes on 90% of your distributions.

In this calculation all IRA's are added together and treated as 1 IRA. it doesn't matter which IRA you actually take the distributions from.

Joe Varga
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