Final answer:
When calculating the nontaxable portion of an IRA, the correct formula is Total Contributions /(Total Contributions + Current IRA Value) × Current IRA Value, which corresponds to option A. This calculates the portion of the withdrawal from a traditional IRA that would not be subject to taxes.
Step-by-step explanation:
When calculating the nontaxable portion of an IRA, specifically a traditional IRA, the formula that should be used is: Total Contributions / (Total Contributions + Current IRA Value) × Current IRA Value. A traditional IRA is an individual retirement account where taxes on earnings are deferred until withdrawals are made. So the correct formula is option A.
This formula is used to determine how much of the current IRA value represents the non-taxable return of your contributions, assuming the account contains non-deductible contributions. In a traditional IRA, tax is not paid on the initial contributions; however, when you start making withdrawals, those amounts are taxed at your current income tax rate, except for any part of the withdrawal that represents a return of non-deductible contributions.