Non-Deductible IRA Contributions Basis Tracking (Form 8606): To Track or Not to Track?

[KS53]

For several years I have moved after-tax dollars to my Roth-IRA and I also contribute to my wife's IRA whatever the max amount is allowed.  That has worked well for me for many years.

However, as my wages increased I gradually got to the place where the following occurs:

1. I can no longer make contributions to my Roth IRA because I'm making too much now.

2. For the same reason, I can no long make a deductible contribution to my wife's Traditional IRA.

As I was doing my taxes this year, I was introduced to the "making non-deductible Traditional IRA" questions.  This, in turn, drew me into the world of form 8606 and given the option to track non-deductible contributions.  I would say that in all the years I've been making contributions to my wife's or my own Traditional IRA, there have been maybe 3 times, I was 1) Allowed to make the contributions but 2) because my income was such I could not take advantage of the deduction.  You may be wondering why I would make a non-deductible contritution, and it's simple, I am trying to at least shelter my earnings from taxes (I know, I'll pay them later, eventually when I withdraw).  Anyway, given that there have only been a few times of made non-deductible contributions should I even bother with an 8606?  I'd say my basis amount through all the years is about $15K.

If I understand it correctly, if I don't provide the basis then when I go to withdraw the funds, I'll end of paying tax on money that has already been taxed (post-tax dollars were contributed).

If I do decide to use a basis, can I do this on one 8606 or do I have to submit amended returns for each year I had non-deductible contributions?  It seems like a lot of hassle to do this and I'm not sure it's worth the effort.

Thanks!

[MinhT1 · Accepted solution]

Filing form 8606 to report nondeductible IRA contributions will help you (and the IRS) keep track of your IRA basis so that you aren't taxed again when you withdraw your after-tax contributions.

If you have filed no Forms 8606 for nondeductible contributions, the IRS may accept a filing of Forms 8606 for all years to establish the correct basis in your traditional IRA.

You don't need to amend your past returns if no other details have changed.

Send the 8606 forms with a cover letter explaining that you omitted to file these forms to the IRS Center where your tax returns would normally be sent.

For 2023 and future years, follow the instructions in this TurboTax Help article to file form 8606 with your tax return.

[fanfare]

If you have a prior basis, put it on 2023 Form 8606 Line 2.

If IRS has a problem with that, they will contact you.

In future, keep it up to date.

your basis will reduce the tax impact of converting your Trad IRA to Roth IRA in amounts that makes sense to you.

Note:

Form 8606 can be mailed by itself only when you are otherwise not required to file a tax return.

The proper way to file missing Form 8606 is attached to Form 1040-X.

@KS53 

[Opus 17]

If you do not track your non-deductible basis on form 8606, then you will pay tax again when you withdraw the money.  The IRS will not keep track for you. There is a penalty of $50 for not filing form 8606 when it is required, unless you can show reasonable cause.  Form 8606 is one of those tax forms you should keep copies for your whole life, not just 3 or 6 years. 

I would recommend filing amended returns to update the non-deductible basis in your wife's IRA.  However, if you can calculate the basis yourself, and include a form 8606 with your 2023 return to add the new basis to the old basis, you can go forward from there, and only have to file the amended returns if the IRS questions your new basis.