General Question about Nondeductible IRA Contributions and Total Basis

[Cris]

Every year we fill out an 8606 form to carry forward our Traditional IRA nondeductible total basis for my wife and my non-deductible contributions (thanks TurboTax for keeping track of that from year to year), but I am not totally clear as to why I do that.  I assume it becomes important once I start taking my RMDs (which I have not yet done).  Will you explain why it is important to keep track of the total nondeductible basis and how this reduces my taxes in the future?

For illustration purposes let's say (hypothetically) I have $100K of total nondeductible basis and a total current value of $400K in my traditional IRA. 

[AmyC · Accepted solution]

The 8606 is critical, great job! Without that form, you would be paying taxes on $400,000 as you take the money out over time. However, thanks to the 8606, you will only be paying taxes on $300,000 over time. The IRS can and has asked for over 20 years of form 8606 filings to be presented when not filed each year as it should have been.

[Cris]

Great answer that makes perfect sense, Amy!  Thanks for helping me understand this topic.