Non-deductible IRA and 8086 IRS form - arrgh!!

[wilkens21]

For some strange reason, I have been living in a vacuum and have NEVER heard of the IRS 8606 form that I guess I need to file with my non-deductible/traditional IRA that I've contributed to for the past few years.I guess the IRS is gonna have a field day with me in terms of fines.

Avoiding IRS Penalties On Your IRA Assets

I heard of it for the first time this evening, after reading an article about the mistakes ppl make for retirement and was like "what is that form?"

I confess to being frustrated, but I guess I will deal with it....

[Nords]

Originally Posted by wilkens21

I heard of it for the first time this evening, after reading an article about the mistakes ppl make for retirement and was like "what is that form?"

One of the (very few) advantages of tax-prep software is that it frequently asks weird questions and won't let you go until you research the subject and cough up the right answers.

Your suffering may be mostly time-consuming instead of financial. If you deducted a contribution that was actually non-deductible then... well... you'd need more help than we could give you here.

But if you didn't deduct when you weren't entitled to deduct and your only sin was the omission of filing the appropriate paperwork, then you may be able to just file the delinquent 8606s for all the missing years and then file the latest 8606 with this year's returns.

You only file an 8606 for years in which you actually make a contribution or a distribution, too, so it may be fewer forms than the number of years.

You'll get the payback someday during conversions or distributions...

[wilkens21]

What equally stinks is that I've been using an accountant the past few years, which is why this is annoying for me. I do not recall ever being asked if I made a non-deductible contribution and how much I made it for. It seems that it's a common problem for people to forget this form as I've looked around on the web for this subject.

[retire@40]

Originally Posted by wilkens21

What equally stinks is that I've been using an accountant the past few years, which is why this is annoying for me. I do not recall ever being asked if I made a non-deductible contribution and how much I made it for. It seems that it's a common problem for people to forget this form as I've looked around on the web for this subject.

Allow me to play devil's advocate:

You made IRA contributions that may or may not have been deductible and you didn't mention it to your accountant?

What did you do with your annual Form 5498 that probably says "Important Tax Document" on it? Hide it from your accountant?

[Martha]

I understand your point retire@40, but the accountants I have worked with seem to do a great job of making sure they collect relevant information. For example, by sending out a worksheet at the beginning of tax season which asks all sorts of questions about what transactions you have had in the prior year.

[retire@40]

Originally Posted by Martha

...the accountants I have worked with seem to do a great job of making sure they collect relevant information. For example, by sending out a worksheet at the beginning of tax season which asks all sorts of questions about what transactions you have had in the prior year.

Tax organizers that are sent out by most CPAs are very useful in uncovering all kinds of useful information and I like them a lot. I would say that if your CPA is not sending you a tax organizer, you may want to look for one who does.

The problem is that some people don't spend 10 or 15 minutes going through the tax organizer. The first 2 or 3 pages have yes/no questions like "did you contribute to an IRA" followed by relevant pages containing some of last year's tax numbers to help jog your memory as to what you may need for the current tax year.

[Shawn]

I submitted my 2006 taxes in early February of last year but then decided to open a traditional IRA in April right before the filing deadline using non-deductible 2006 contributions (you can contribute to an IRA for the previous year up until the April filing deadline). I called the IRS to see if I needed to submit an amended return. I was told that all I needed to do was submit form 8086 with a note stating that this was for information purposes only, since it did not change my tax liability. I don't know how your situation will be handled since it deals with previous years, but as Nords said, you may be OK if you simply supply the IRS with the missing information.

As an aside, my plan is to convert the IRA to a Roth IRA when I ER, or in 2010 when the income exclusion limit for conversions is slated to be eliminated. I will pay taxes only on the gains since I've already paid taxes on the contributions. I hope to do the same with after-tax contributions made to employer retirement accounts. That is, after I retire, I will roll these funds into the traditional IRA and then convert to the Roth. Of course, all this assumes no significant changes to tax law over the next few years.

[wilkens21]

Sigh, I called and yelled at my accountant today for this mess-up. My IRA provider is sending me some 5498 forms that detail my contributions to the account from the beginning. With these forms, I can prove what I contributed and also will include statements from my past tax returns and I guess pay whatever fine is out there as well.

The IRS just makes things incredibly confusing, just don't be like me folks and you'll retire early

[kaneohe]

Originally Posted by wilkens21

and I guess pay whatever fine is out there as well

I don't have any personal experience in this matter but, for what it's worth,
I get the impression that the IRS has not been particularly rigorous in enforcing the $50/yr threatened fine (from fairmark.com forum). The
folks there however do urge that you submit the missing 8606 forms
(one for each yr) ASAP before IRS changes its mind.

[clifp]

Originally Posted by wilkens21

Sigh, I called and yelled at my accountant today for this mess-up. My IRA provider is sending me some 5498 forms that detail my contributions to the account from the beginning. With these forms, I can prove what I contributed and also will include statements from my past tax returns and I guess pay whatever fine is out there as well.

The IRS just makes things incredibly confusing, just don't be like me folks and you'll retire early

In the last couple of months there was a thread about non deductable IRA, one of my arguments against doing this was the paperwork. Several poster said hey the paperwork is no big deal, with no personal experience I shut up. However, it does appear that it is a big deal if you don't know you had to file some paperwork!

[CyclingInvestor]

Originally Posted by clifp

Several posters said hey the paperwork is no big deal, with no personal experience I shut up. However, it does appear that it is a big deal if you don't know you had to file some paperwork!

Yeah, I was one of them. I made a few non-deductable contributions in the early 90's, filed the
8606's, and thus was able to claim $85.52 of my 72t distribution was tax-free last year. Once
you set up the spreadsheet to track it, it's pretty easy.

[youbet]

Originally Posted by clifp

In the last couple of months there was a thread about non deductable IRA, one of my arguments against doing this was the paperwork. Several poster said hey the paperwork is no big deal, with no personal experience I shut up. However, it does appear that it is a big deal if you don't know you had to file some paperwork!

Clifp..... Unless you're a different person when filling out a simple form than you are when you compose posts here, the 8606 won't be an issue. It is NO BIG DEAL. (Of course, knowing you need to fill out the form and not forgetting to take 5 mins and do it each year is a big plus in keeping it from getting complicated! )

It's just a little tracking sheet that tracks the bux you contributed to your contributory IRA that were non-deductible vs. the ones that weren't. That's it.

[wilkens21]

So I just want to be sure, filing the 8606 form each year will enable me to NEVER get taxed on those contributions correct even when I withdraw at age 60? Or am I not understanding this well?

IRS makes things stupidly confusing which gets me so angry

[Nords]

Originally Posted by wilkens21

So I just want to be sure, filing the 8606 form each year will enable me to NEVER get taxed on those contributions correct even when I withdraw at age 60? Or am I not understanding this well?

When you file the 8606s for your previous years' returns, your non-deductible contributions are tracked as the cost basis of the IRA and won't be taxed when you start taking distributions or if you convert to a Roth IRA.

Of course you'll still pay taxes on the deductible contributions and all the profits from all the contributions. When you eventually take distributions or convert, the rest of form 8606 is used to plug through the calculations to determine how much tax you pay.

After you've filed them and squared up with the IRS, you only need to retain the latest 8606. It sums up all the earlier non-deductible contributions.

[wilkens21]

Nords: thanks for this explanation...I'm pretty embarrassed that I didn't even know any of this until this past week....