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Tax Pros: What happens to non-deductible IRA contributions at retirement?

Asked by: pmitchem 2207 views YA Discussion

There are traditional IRAs where you take a tax deduction for each year’s contribution. I’ve been told that if you make an IRA contribution that turns out to be non-deductible you file form 8606 that it is non-deductible.

Then at retirement time when you start taking money out of the IRA, you don’t have to pay income tax on the IRA contributions that were non-deductible.
How does this exactly occur? Do you file a form with the IRS when you withdraw funds from your IRA at retirement age, and have to submit any sort of documentation for approval? Or is this something that you are asked for only if you get audited?

Could some kind Tax Pro please do a brief walk thru how this works? Thank you!

2 Answers

  1. Quick Answers on Apr 09, 2012 Reply

    What part of publication 590 do you not understand. I’ve already cut and pasted it once for you.

    Without the form 8606s being filed, it’s ALL assumed to be taxable.

    Since you failed to file the forms, it’s up to you to convince the IRS that some of this is after tax money. The time to do this is NOW, not when you retire.

    Get your proof together (5498, copies of tax returns showing that you didn’t take a deduction) and file the 8606 forms now with 1040X forms. Then pray that the IRS agrees with you.

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  2. Bobbie on Apr 09, 2012 Reply

    You will have to go back and file the 8606 for the past years that you claim that you did make these NONDEDUCTIBLE contributions amount to your traditional IRA account and also the trustee would have sent you and the IRS a copy of the 5498 during the tax year reporting your balances in your IRA account each year.
    You are supposed to have the form 8606 for each year with your COST basis NONDEDUCTIBLE total amount of contributions when you do retire so that you can determine the correct amount of your cost basis that you will recover free of the federal income taxes a few dollars each month or year over a period of year until your total cost basis is recovered free of income taxes and they do have the simplified table in the instruction book that will be used for this purpose when the time does come for you to use it.
    The Publication 590


    Distributions Fully or Partly Taxable

    Distributions from your traditional IRA may be fully or partly taxable, depending on whether your IRA includes any nondeductible contributions.
    Fully taxable. If only deductible contributions were made to your traditional IRA (or IRAs, if you have more than one), you have no basis in your IRA. Because you have no basis in your IRA, any distributions are fully taxable when received. See Reporting and Withholding Requirements for Taxable Amounts , later.

    Partly taxable. If you made nondeductible contributions or rolled over any after-tax amounts to any of your traditional IRAs, you have a cost basis (investment in the contract) equal to the amount of those contributions. These nondeductible contributions are not taxed when they are distributed to you. They are a return of your investment in your IRA.

    Only the part of the distribution that represents nondeductible contributions and rolled over after-tax amounts (your cost basis) is tax free. If nondeductible contributions have been made or after-tax amounts have been rolled over to your IRA, distributions consist partly of nondeductible contributions (basis) and partly of deductible contributions, earnings, and gains (if there are any). Until all of your basis has been distributed, each distribution is partly nontaxable and partly taxable.

    Form 8606. You must complete Form 8606, and attach it to your return, if you receive a distribution from a traditional IRA and have ever made nondeductible contributions or rolled over after-tax amounts to any of your traditional IRAs. Using the form, you will figure the nontaxable distributions for 2011, and your total IRA basis for 2011 and earlier years. See the illustrated Forms 8606 in this chapter.


    If you are required to file Form 8606, but you are not required to file an income tax return, you still must file Form 8606. Complete Form 8606, sign it, and send it to the IRS at the time and place you would otherwise file an income tax return.
    Figuring the Nontaxable and Taxable Amounts

    If your traditional IRA includes nondeductible contributions and you received a distribution from it in 2011, you must use Form 8606 to figure how much of your 2011 IRA distribution is tax free.


    Hope that you find the above enclosed information useful. 04/09/2012

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