Non-Deductable IRA Contributions

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PinotGris
Posts: 674
Joined: Tue Feb 14, 2012 9:38 pm

Non-Deductable IRA Contributions

Post by PinotGris » Mon Dec 02, 2019 3:34 pm

When I was at-home Mom, we made contributions to a spousal IRA for the spouse with no earned income. It is deductible as long as our income did not exceed a certain limit. Then I started working and did not have a 401K at work and continued to contribute to the Spousal IRA. In some years our income exceeded the limit but I still contributed the full amount, and some of it was not deductible. Then I stopped. So I have a mess now with an IRA mingled with pre and post tax contribution. Our Turbo-tax generated a cost basis for these years which I have saved. I have no Roth IRA.

I will need to start withdrawals next year. How does this work now? Vanguard who has this IRA will let me know how much I need to to draw out based on the value of the IRA. It is about 300,000 now. I have my total costs basis for those years when they were post-tax contributions. What do I do with these two amounts to figure what I can claim as tax free, as it if were a withdrawal from a Roth?

If any of you have experienced this I would really appreciate if you can share. Thank you.

Davistax
Posts: 44
Joined: Fri Aug 28, 2015 9:24 pm

Re: Non-Deductable IRA Contributions

Post by Davistax » Mon Dec 02, 2019 3:37 pm

You will file form 8606 with your tax return for any year you have a distribution. This form will calculate how much of your distribution is taxable.

jebmke
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Joined: Thu Apr 05, 2007 2:44 pm

Re: Non-Deductable IRA Contributions

Post by jebmke » Mon Dec 02, 2019 3:38 pm

When you filed your taxes for years you had non-deductible contributions you should have filed a Form 8606 which declares the contribution as the cost basis for that year. It is a cumulative form that will carry over to later years and show the accumulating cost basis.

When you start to take out money, you will use the same form (8606) to allocate the distribution between deductible and non-deductible money. The deductible part will appear on your 1040 as declared income on line 4b. The to The total distribution will appear on line 4a. Only the amount in 4b will accumulate in your AGI and thus, taxable income.
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Katietsu
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Re: Non-Deductable IRA Contributions

Post by Katietsu » Mon Dec 02, 2019 3:49 pm

If you are using tax software, the withdrawal will be entered from a 1099-R. If you use the same software from year to year, filed a form 8606, and pull your data forward, the basis will fill in for you. If the basis does not fill in automatically, you will need to enter it manually. The taxable portion should then calculate for you. The remaining basis to use for the next year will also calculate.

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FiveK
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Re: Non-Deductable IRA Contributions

Post by FiveK » Tue Dec 03, 2019 2:52 am

It's not uncommon for the tax software Q&A to mislead people, leading to an incorrect form 8606.

You might fill out a draft version of 8606 by hand so you know how it is supposed to look, and compare that to whatever your tax software generates.

ryman554
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Joined: Sun Jan 12, 2014 9:44 pm

Re: Non-Deductable IRA Contributions

Post by ryman554 » Tue Dec 03, 2019 9:25 am

FiveK wrote:
Tue Dec 03, 2019 2:52 am
It's not uncommon for the tax software Q&A to mislead people, leading to an incorrect form 8606.

You might fill out a draft version of 8606 by hand so you know how it is supposed to look, and compare that to whatever your tax software generates.
+1 on this.

*look* at the last form 8606 you have. On there, should be your basis (sum of non-deductible contributions -- contributions only, as all earnings are tax-deferred). that should be on (or near) line 14.

Then go to the IRS website and download the latest form 8606. Pretend today is Dec 31, and you are making a withdrawal from your tIRA. Go through step by step. Your answer should be that your taxable income from a withdrawal is a percentage of what you withdrew. The rough percentage is:

amount tax-deferred in tIRA / (total amount in tIRA) -> <calculated as if you withdrew/converted on Dec 31>

The steps to get there are byzantine, to say the least, so work it out so you know what to expect At the OP indicated, tax software can lead you astray and doing it once will allow you to avoid large goofs (say on line 5, 6, 7, 8) <that's: your basis, how much was in there, how much you withdrew, and how much you converted to a Roth).

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Non-Deductable IRA Contributions

Post by Spirit Rider » Tue Dec 03, 2019 10:39 am

The best solution would be to find a way to generate some reasonable self-employment income, adopt a one-participant 401k, rollover all of the pre-tax balances in all traditional, SEP and SIMPLE IRA accounts to the one-participant 401k and do a Roth conversion of the remaining balances. This can not be a Vanguard Individual 401k, because Vanguard does not accept IRA rollovers.

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Non-Deductable IRA Contributions

Post by livesoft » Tue Dec 03, 2019 10:48 am

My spouse and I both made non-deductible traditional IRA contributions more than a decade ago. We dutifully filed Form 8606 for each of us at the time as required by the IRS and our Form 1040 tax return. Now that we are drawing down those IRAs to make Roth conversions we are dutifully filing Form 8606 each year as required by the IRS and our Form 1040 tax return.

So if you have your past tax returns along with your most recent Form 8606, then this should all be relatively easy: Simply file Form 8606 with your new numbers. Done.
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