Distributions you receive from your IRA after you reach age 59 ½ are generally subject to tax as ordinary income. Whether the distribution is fully or partially taxable depends on whether you have made non-deductible contributions.
But distributions that are properly and timely rolled over are not subject to tax.
Fully or Partially Taxable IRA Distributions
If all your contributions to your IRA were deductible, the distributions you receive (after you reach age 59 ½) will be fully taxable. If you have made non-deductible contributions you have an investment, or cost basis in the IRA, and part of a distribution will be a return of cost, and therefore non-taxable. If you have made non-deductible contributions, you will need to file Form 8606.
If you receive a distribution and also make contributions to your IRA the same year, you will first need to complete the worksheet, “Figuring the Taxable Part of Your IRA Distribution” to determine the taxable and non-taxable portions of the distribution, and your remaining basis in the IRA after the distribution, and then file Form 8606.
Withdrawing Contributions Made During the Year
If you make a contribution and then withdraw it before the due date for filing your tax return for that year, the distribution is not taxable. In this case, you must not take a deduction for the contribution, and you must withdraw any earnings on the contribution. You calculate the earnings on the contribution on a prorated basis, comparing the fair market value of the IRA immediately before the contribution is removed to the fair market value immediately after the contribution was made. These distributions are tax-free because they are a return of contributions (and earnings) made during the year, and are not subject to the 10% additional tax.