Why does TT ask "Tell me the value of your Traditional IRA?"

[david9821]

I know this is the sum of your Traditional IRAs - no ROTHs. Why is it asking this? I feel I've left this blank in the past since I saw no tax issues related to this. Is it important? If so why?

[macuser_22]

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@david9821 wrote:

I know this is the sum of your Traditional IRAs - no ROTHs. Why is it asking this? I feel I've left this blank in the past since I saw no tax issues related to this. Is it important? If so why?

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If you have a non-deductible basis in the IRA then the year end value is critical, because knowing that is the only way to calculate the taxable amount of the years distribution which must be prorated between the distribution and total value of all remaining Traditional, SEP and SIMPLE IRA that exist on Dec 31  if the year of the distribution.   That is calculated in on lines 6-15 on a 8606 form.

Failing to enter that year end value will make the value 0 so all remaining basis will be applied resulting is a taxable amount less than what it should be.    The IRS can assess back tax and interest if and when they catch up with this and that can be a large tax bill depending on the amount of underpaid tax.

[david9821]

@macuser_22 What is a non-deductible basis in an IRA anyway? What is a deductible basis in an IRA?

An IRA, a Traditional IRA or Rollover IRA is fully taxable every time you withdraw from it or convert some of it to a ROTH -- which I do every year. The only difference is if you had put some money into it that was already taxed. I don't understand the word deductible with respect to IRAs, actually I don't understand basis either. Can you say more please? thanks! 

[fanfare]

""The only difference is if you had put some money into it that was already taxed."

exactly. that is your basis.

Did you ever do that ??

[fanfare]

your IRA contribution may or may not be deductible in the year you make that contribution either by law or by your own election. You have to report accordingly.

[macuser_22]

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@david9821 wrote:

@macuser_22 What is a non-deductible basis in an IRA anyway? What is a deductible basis in an IRA?

An IRA, a Traditional IRA or Rollover IRA is fully taxable every time you withdraw from it or convert some of it to a ROTH -- which I do every year. The only difference is if you had put some money into it that was already taxed. I don't understand the word deductible with respect to IRAs, actually I don't understand basis either. Can you say more please? thanks! 

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A "deductible" Traditional IRA contribution as the word implies, reduces your taxable income resulting in lower tax or larger refund for the tax year that the contribution is made, but as you said, you pay the tax when you withdraw the funds.

A "nondeductible" Traditional IRA contribution does not reduce your taxable income and because you have already paid the tax, is not taxable (on a pro-rated basis) when  you withdraw the money, so it reduces the tax or increases the refund in the tax year it is withdrawn rather then when contributed.

Depending on your income, if your AGI is too high, you are not allowed to deduct a Traditional IRA, but can always make a non-deductible contribution anyway, which adds to the basis.

When you make a Traditional IRA contribution you can also choose non-to deduct the contribution in order to reduce future tax when withdrawn.   Some taxpayers do that for various reasons.

Those non-deductible contributions are called "basis" that is tracked on a 8606 form that must be filed each year that a non-deductible contribution is made.   The 8606 also tracks the total nondeductible "basis" in the Traditional IRA and is used to calculate the taxable amount of distributions (withdraws) by calculating the ratio of the current years distributions with the total year end value of ALL Traditional, SEP, and SIMPLE IRA's that exist.    Since it is a ratio, only part of the basis will be used, and the remaining basis carries forward for future distributions.

All existing Traditional IRA values are added together to determine the year end value because the basis applies to all such IRA accounts.

[david9821]

I think I am getting it now....so if you never made a non-deductible contribution there would be no need to report the value of the total of your Traditional IRAs?

[macuser_22 · Accepted solution]

If you never made a non-deductible contribution then the question in TurboTax that asks "Any non-deductible contributions made to your IRA?" should be answered NO and that year end value question will never be asked.