What is the tax basis rule for a taxpayer making distributions from a retirement account?

The tax basis rule for a taxpayer making distributions from a retirement account revolves around the concept of basis, which refers to the contributions that have already been taxed. In most retirement accounts, contributions are made with pre-tax dollars, meaning that the account itself grows tax-deferred until distributions are made. However, when it comes to withdrawals, any contributions that have been previously taxed become critical in determining how much of the distribution can be received tax-free.

When a taxpayer takes a distribution from a retirement account, such as an IRA or 401(k), the amount that represents the post-tax contributions (the basis) can be withdrawn without incurring additional tax. Only the earnings on contributions or the pre-tax contributions are subject to taxation when distributed. Therefore, it’s accurate to say that only those contributions that were already taxed can count against the tax basis, allowing the taxpayer to minimize their taxable income during the distribution period.

This principle helps to ensure that individuals do not pay taxes twice on the same money once they start taking distributions from their retirement accounts. Understanding this foundational concept is crucial for effective tax planning and compliance related to retirement account distributions.