Ask the Expert: Can after-tax contributions to a tax-deferred retirement account be withdrawn first?

You’ve written that after-tax contributions to a tax-deferred retirement account can be withdrawn tax-free, even though their earnings are taxable when withdrawn. I’ve made about $25,000 of after-tax IRA contributions over the years. When I retire, can I take out that tax-free $25,000 as my first withdrawal?

No. You can’t remove your after-tax contributions in a lump sum. They must be withdrawn on a pro-rata, or proportional, basis.

You get no tax deduction for an after-tax contribution. If you earn $75,000 a year and make a $6,500 after-tax IRA contribution, for example, your taxable income is still $75,000. The trade-off: that $6,500 is tax-free when you withdraw it.

The after-tax contribution comes out pro rata: If your IRA balance is $100,000 and you made $6,500 in after-tax contributions, 6.5% of each withdrawal is tax free.

“Making non-deductible IRA contributions is like adding cream to a cup of coffee. There’s going to be a little cream in every sip you take — you can’t remove it separately,” said Ed Slott, a Rockville Centre tax accountant.

Non-deductible IRA contributions originally were made mostly by people who didn’t qualify to make deductible contributions. But today, they’re often used as a “back door” into a Roth IRA by people whose high earnings disqualify them from contributing directly to a Roth. There’s no earnings limit on converting a traditional IRA to a Roth IRA, and it’s perfectly legal to build a traditional IRA with non-deductible contributions and then convert it to a Roth IRA.

But if you’re converting a traditional IRA that includes both deductible and non-deductible contributions, you must follow the pro-rata rule to calculate the tax on the conversion.

The bottom line:

Your non-deductible IRA contributions are tax-free when you withdraw them in retirement, but you can’t withdraw them in a single lump sum distribution.

More information:

bit.ly/IRSiradistributions;

bit.ly/3HcCnz6