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vdirjohn
Level 1

Why is my non-deductible IRA contribution (Form 8606) effected by my IRA value?

I made my first distribution from my traditional IRA in 2019 (to do a Roth Conversion).  As expected, entering the 1099-R ($50,000) caused my Federal Tax Due to increase.  TT next asked if I had made any Non-Deductible contributions in previous years - Yes, I did - $20,000 over a ten year period (1987-1996).  As expected, entering the $20,000 caused my Federal Tax Due to decrease.  Paying taxes on $30,000 instead of $50,000.  All is good.  TT next asked for the value of my IRAs as of 12/31/19.   Enter that number (>$500,000) caused the Federal Tax Due to increase again????? Why? Instead of paying taxes on $30,000 I am now paying taxes on $48,000.  My $20,000 was reduced to $2,000.  Why?  I have already paid taxes on the $20,000 but now I only get credit for $2,000.  I am forced to pay taxes twice on the difference ($18,000)? That doesn't seem right.

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Accepted Solutions
VolvoGirl
Level 15

Why is my non-deductible IRA contribution (Form 8606) effected by my IRA value?

You can't apply the whole 20,000 non deductible amount to this one distribution.  It has to be allocated over the whole balance of the account.  You have to keep track of it on form 8606.

View solution in original post

4 Replies
VolvoGirl
Level 15

Why is my non-deductible IRA contribution (Form 8606) effected by my IRA value?

You can't apply the whole 20,000 non deductible amount to this one distribution.  It has to be allocated over the whole balance of the account.  You have to keep track of it on form 8606.

View solution in original post

vdirjohn
Level 1

Why is my non-deductible IRA contribution (Form 8606) effected by my IRA value?

I had no idea but it makes perfect sense.  I found the new 8606 added to my tax return and it shows the calculations used to allocate $2,000 of the $20,000 leaving $18,000 to be used with future distributions.  Thanks.

VolvoGirl
Level 15

Why is my non-deductible IRA contribution (Form 8606) effected by my IRA value?

Well look at it this way.  50,000 is 10% of the total 500,000.  So you get to take 10% of the 20,000.  @dmertz is that right?

dmertz
Level 15

Why is my non-deductible IRA contribution (Form 8606) effected by my IRA value?

VolvoGirl, you are close, but not quite right.  The divisor is the year-end balance plus the amount of the distribution.  Using the numbers provided, the amount that is nontaxable is $50,000 * $20,000 / ($50,000 + year-end balance of about $500,000).

 

I think that vdirjohn now understands that because the basis in nondeductible contributions is distributed proportionately, the last of the basis will not be distributed until the last of the traditional IRA funds is distributed.

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