Non Deductible Portion of IRA

[Kato408]

My husband and I have made IRA contributions for years but this is the first year that I received notification that only a portion of our contributions is deductible. I understand that we each file a Form 8606 but I am confused about what to do with it. Does this carry over each year? If this happens in future years is the amount cumulative until retirement? When I take an RMD do I report the deductable and nondeductible portion or just state which "pool" of money it came from? I am 15 years away and don't want to mess up now. 

Thanks, Karin 

[ColeenD3 · Accepted solution]

Yes, the 8606 carried forward in a way. It will not generate in a year that you don't make a non-deductible contribution, but the amounts stay valid. It may not be a bad idea to print the form out and keep it in a safe place to keep track of your contributions should you not continue to use TurboTax for the next 15 years.

When you take your distributions, Form 8606 also will come into play as that is where the taxable and nontaxable portions of your IRA will be calculated.

[macuser_22]

Keep a copy of the 8606 in case it doe not automatically carry to next year.  You will only get a new 8606 if something  on the last 8606 changed.  If no change then the last filed 8606 remains in effect.

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.

When you take a distribution 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.