If a taxpayer has made nondeductible contributions to traditional IRAs in past years, the distribution of those amounts is not subject to taxation, either on the taxpayer’s return or on their heirs’ returns.
If a distribution is made from an IRA that consists of deductible and nondeductible contributions, the following formula determines the portion of the distribution that constitutes a nontaxable return of basis.
| Nontaxable return | Total nondeductible contributions – Amounts previously recovered | Distribution | ||
| of basis | = | Total end-of-the-year IRA Balance + Distribution amount | X | amount |