Deductions & credits

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@nblandfo wrote:

I have a traditional IRA from a previous employer. I now make non-deductible contributions each year which I track. From my understanding, reporting these contributions on Form 8606 prevents double-tax on withdrawal in the future. However, you get a tax break (IRA deduction line 19) if you make these contributions deductible. So which is more beneficial? Yeah, you avoid a double tax but you get a tax break now. 

I am just discovering form 8606, and have failed to file it 2018-2020. I already got the tax break for the deductible contributions I made for these years. If I decide to change this as non-deductible contributions via Form 8606 (as they were actually post-tax when I contributed), do I need to amend each year's tax return since I was overpaid (IRA deduction line 19)?

Thanks

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Assuming that you rolled the previous employer plan into a Traditional IRA then...

There is really no reason to make a nondeductible contribution to a Traditional IRA when you are qualified to deduct it.   About the only reason to make a nondeductible contribution is when you are covered by a retirement plan at work and you income AGI is too high to be able to deduct or to contribute to a Roth IRA (which are always after-tax contributions.    If your AGI permits, you can just contribute to a Roth IRA instead if you want tax free distributions in the future.

And...

You can NEVER withdraw ONLY the nondeductible part - it must be prorated over the entire value of ALL Traditional IRA accounts which include SEP and SIMPLE IRA's. (For tax purposes you only have ONE Traditional IRA which can be split between as many different accounts as you want, but for tax purposes they are all added together).

For example using rough figures: if you had $60K of nondeductible contributions in an IRA with a total value of $600K (10:1 ratio), then when you take a $60K distribution from any IRA account $6,000 would be nontaxable and $54,000 would be taxable (same 10:1 ratio) , with the remaining $54K of basis staying in the IRA for future distributions. As long as there is any money in the IRA, there will be some basis.

TurboTax will ask for your non-deductible "basis" and then the *Total Value* of *all* Traditional IRA, SEP and SIMPLE accounts as of Dec 31, of the tax year. That is so the prorating of the basis can be properly proportioned between the current years distribution and the remaining IRA value. That is done on the 8606 form.