Avoiding double taxation on IRA contribution

[ocean view]

LOL!,



Thanks for the reply. That's pretty much what I was thinking. I've always been bothered by the fact that you have to mail things to the IRS, you don't get confirmation of receipt, but if later down the road they argue you never sent them something, they have the right to penalize you for it. And even if you call them to confirm receipt, they can't tell you. It just seems like there has to be a better way.

Did you mail it certified and keep copies? That's your proof of mailing. I always track my certified mail and print the detailed record that shows it was delivered.

Since you included a letter you MAY get a letter back that says "we got your inquiry and we're checking on it, we'll reply soon".

 

[Fedup]

They are too busy to reply. So I think just keep a copy of what you sent, do t expect anything.

 

[Sunset]

OP - I sure hope you went over all your tax returns from the past to track the amount correctly, as it sounds like you failed one year to carry over the past year amount in order to keep a running total.

The runnning total should show on the 8606.

By the way, you don't need to file the form, IF you didn't make a contributions for a specific year.

 

[PERSonalTime]

I think you can request a transcript of your prior years tax returns from the IRS, but if the form is not in your TTax files then it did not get sent to the IRS. I'm also pretty sure that you only have to send in form 8606 if you actually made non-deductible IRA contributions during that year. Did you contribute during 2014-2016? If not, then you will just use the numbers from the 2013 copy the next time you have to fill out the form.

You keep track of your contributions by filling out form 8606. You could keep a spreadsheet if you want, but if you fill out form 8606 every time you make a non-deductible contribution, that is your running tally.

When you are taking RMDs, you have to value all your IRAs together as if they were one account and take out the required percentage of the total. As you fill out form 8606 for that year, it will help you calculate how much of your withdrawal is taxable. It's a straight proportion, so if 20% of your IRA is non-deductible contributions, then 80% of the withdrawal is taxable and the basis is reduced by the remainder of the withdrawal and the new amount is reported on form 8606.

When you say "...value all of your IRAs together as if they are one account..." what happens if you have a rollover IRA (traditional) from a 401k? Also, how to you value IRAs? Example: Non-deductible IRAs - $5000; Rollover IRA - $2000; Withdrawal of $500. How much of the $500 is taxable?

 

[Fedup]

It's the ration of non-deductible over the deductible. This is why I converted my non deductible immediately to Roth IRA.

 

[Alan]

It's the ratio of non-deductible over the deductible. This is why I converted my non deductible immediately to Roth IRA.

+1

The year I retired I converted my non-deductible IRA to a Roth as 401k values are not included in the ratio. The following year I rolled over my before tax 401k to a Rollover IRA. Much cleaner this way if you can manage it.

Roth conversions were not available to us when DW retired from her company in 2004 and we rolled over her 401k and cash balance pension plan to an IRA so she has a substantial after tax basis that the 8606 forms keep track of on each Roth conversion.

 

[Sunset]

When you say "...value all of your IRAs together as if they are one account..." what happens if you have a rollover IRA (traditional) from a 401k? Also, how to you value IRAs? Example: Non-deductible IRAs - $5000; Rollover IRA - $2000; Withdrawal of $500. How much of the $500 is taxable?

You add up ALL your IRA's but not ROTH's, not 401K's that are still 401K's

Example:
Rollover from 401K to IRA years ago = $100K
IRA at some brokerage = $30K
IRA at another brokerage =$20K
IRA at third brokerage with $5,000 non-deductible contributions inside it and some deductible contributions =$10,000

Total IRA value = $160,000.

take out $500 from ANY IRA

$5,000 / 160,000 = 0.03125 is the percentage that is non-duductible

So using a withdrawal of $500:
$500 * 0.03125 = 15.625 is non-taxable

Also means you now have left $484.375 remaining non-taxable contributions inside your IRAs. So if next year all IRA's are worth $175,000 then the ratio would be:
484.375 / $175,000

You will need to track this number every year until you have no IRA's left.

 

[PERSonalTime]

You add up ALL your IRA's but not ROTH's, not 401K's that are still 401K's

Example:
Rollover from 401K to IRA years ago = $100K
IRA at some brokerage = $30K
IRA at another brokerage =$20K
IRA at third brokerage with $5,000 non-deductible contributions inside it and some deductible contributions =$10,000

Total IRA value = $160,000.

take out $500 from ANY IRA

$5,000 / 160,000 = 0.03125 is the percentage that is non-duductible

So using a withdrawal of $500:
$500 * 0.03125 = 15.625 is non-taxable

Also means you now have left $484.375 remaining non-taxable contributions inside your IRAs. So if next year all IRA's are worth $175,000 then the ratio would be:
484.375 / $175,000

You will need to track this number every year until you have no IRA's left.

Sunset,

Thanks for the detailed example!!! One more question. When do you determine the value of all of the IRAs? Is it on the day you make the $500 withdrawal, at the end of the year Dec. 31st, or some other triggering point?

Thanks again.

 

[PERSonalTime]

Also you said 484.375 non-taxable contributions would be left inside the IRAs after the $500 withdrawal. How could that be with I initially had $5,000 worth of contributions within the one of the IRAs?

 

[kaneohe]

Sunset,

Thanks for the detailed example!!! One more question. When do you determine the value of all of the IRAs? Is it on the day you make the $500 withdrawal, at the end of the year Dec. 31st, or some other triggering point?

Thanks again.

You might want to go thru an example on F8606 https://www.irs.gov/pub/irs-pdf/f8606.pdf I think you will find that the valuation of remaining TIRAs is done at year end and the valuation of the withdrawn portion is done at withdrawal. You add them up at some point to determine the "total" value
so a little bit of fiction is involved.

 

[kaneohe]

Also you said 484.375 non-taxable contributions would be left inside the IRAs after the $500 withdrawal. How could that be with I initially had $5,000 worth of contributions within the one of the IRAs?

I think Sunset was trying to see if you were paying attention
Give us the real answer to get your degree.

 

[PERSonalTime]

You might want to go thru an example on F8606 https://www.irs.gov/pub/irs-pdf/f8606.pdf I think you will find that the valuation of remaining TIRAs is done at year end and the valuation of the withdrawn portion is done at withdrawal. You add them up at some point to determine the "total" value
so a little bit of fiction is involved.

Thanks! Hopefully, TT will take care of all of that.

 

[PERSonalTime]

i think sunset was trying to see if you were paying attention
give us the real answer to get your degree.

lol!!! $4,500.

 

[kaneohe]

lol!!! $4,500.

closer! ........but no degree yet. Remember you are asking for non-deductible contributions left in TIRA. You started with $5K and withdrew
$500 of which 15.625 is non-deductible (basis).......so 5K minus 15.625 is left.

 

[Sunset]

closer! ........but no degree yet. Remember you are asking for non-deductible contributions left in TIRA. You started with $5K and withdrew
$500 of which 15.625 is non-deductible (basis).......so 5K minus 15.625 is left.

Thanks for stepping in.
I went away so didn't see my "oops" , Yep $4,984.375 would remain in the IRA as non-deductible contributions.

 

[PERSonalTime]

$4,984.37!!! Shucks, I think Sunset stole my glory! LOL.

Thanks to the both of you!!!