Good info on non-deductible contributions to IRA and the 8606?

[Alan]

The part that's confusing for some of us is that you are talking about "deductible", "non-deductible" and "Roth" IRAs and the closing of "non-deductible" accounts. It's hard to untangle what you mean by a "non-deductible IRA" because that's not a standard term.

As someone who was fortunate enough to have only ever had the option of using a non-deductible IRA then I personally think it is a standard term.

https://smartasset.com/retirement/w...IRA is,deductible contributions grow tax free.

A non-deductible IRA is a retirement plan you fund with after-tax dollars. You can’t deduct contributions from your income taxes as you would with a traditional IRA. However, your non-deductible contributions grow tax free. Many people turn to these options because their income is too high for the IRS to let them make tax-deductible contributions to a regular IRA.

 

[cathy63]

As someone who was fortunate enough to have only ever had the option of using a non-deductible IRA then I personally think it is a standard term.

https://smartasset.com/retirement/w...IRA is,deductible contributions grow tax free.

OK, let's say it's a financial industry term not a tax term. For tax purposes, it's the contributions that are deductible or non-deductible, not the account itself.

 

[sheehs1]

I would recommend not starting a nondeductible IRA. I was in the same situation as you—I had maxed out my tax-deferred retirement plan, was in a high tax bracket and did not qualify for a Roth IRA or a tax-deferred IRA. But by contributing to a non-deductible IRA, you must now track your cost basis across all your IRAs. And when you withdraw, the gains are taxed at ordinary income rates. Whereas, if you instead invest it in taxable investments, the gains are taxed at the more favorable long term capital gains rate.

I do wish I had never started a non-deductible IRA and had instead put the extra income into tax efficient mutual funds.

I was in the same situation and started a nondeductible IRA years ago thinking if I was ever in the situation where I could contribute or convert to a Roth I could use just this money to do so. Wrong! I agree with your recommendation of "not" starting one. It has confused many along the way that wanted to consolidate my IRA's until I explain to them it is a NONDEDUCTIBLE IRA and I've already paid tax on the contributions. It's a quirky complication to figuring out the pro rata distributions or withdrawals in the future.

 

[Montecfo]

OK, let's say it's a financial industry term not a tax term. For tax purposes, it's the contributions that are deductible or non-deductible, not the account itself.

Yet in my view it contains within it that kernel of wisdom: All of your non-deductible contributions belong in your Non-Deductible IRA.

 

[youbet]

There are good reasons, pro and con, for making (or not) non-deductible contributions to a TIRA. But one of the cons is NOT tracking them or filing form 8606. That's easy. The only part I ever found the least bit complicated was getting through to myself the concept that there is no such thing as a "deductible" or "non-deductible" TIRA. There are only "deductible" or "non-deductible" contributions, which you track via form 8606.

I converted my "mixed" TIRA to a Roth before I converted my 401k to a TIRA, so my form 8606 days are over. And I'm still not sure if the non-deductible contributions paid off financially, but tracking them and filing form 8606 was no issue, even for a blue collar guy like me.

 

[NYCFire]

Once you have no basis in your IRAs you stop filing the 8606.

Since the OP currently has no deductible IRAs he could make a contribution and immediately do a Roth conversion. He would file an 8606 each year he makes the contributions and conversions but when he comes to withdrawals, no 8606s required since all the money including growth in the Roth is tax free.

I have a non-deductible IRA that I haven't made any contribution (or withdrawal) to since 2015. My last 8606 filed was for 2015. I have no other IRAs. My understanding was that since I had no IRA transactions I need not file 8606s for such years. My plan was to start re-filing 8606s when I begin making IRA withdrawals in several years. Have I been handling this correctly or do I need to file 8606s for each of the no-transaction years?

 

[beowulf]

Thank you for all the informative posts. From my perspective, I believe Cathy63 has come closet to addressing my question. Others have answered questions I didn't ask or didn't believe they has enough information. However, even with caveats, I don't see a simple yes or no answer to the question I asked - which is - once you close out a traditional non deductible IRA (meaning the account no longer exists) do you have to file an 8606 until your traditional deductible IRAs (you did not include the value of your contributions each year as part of your income) are all closed out or inherited.

Our situation is as follows:
1 traditional deductible IRA for each of us
1 traditional non deductible IRA for each of us (one closed and deactivated several years ago)
1 Roth IRA for each of us
8606s filed for each of us for every year there were any additions or withdrawals to all of our accounts

We understand the pro rata rule, which is why we file the 8606s. We have never done a conversion to a Roth and have no plans to do so.

We plan to withdraw all funds from the remaining traditional non deductible IRA in 2022 and will file an 8606 for that account at tax time in 2023.

My questions are what I believe can be answered with simple yes or no responses.

After our last traditional non deductible IRA is closed, is there a legal requirement to continue to file an 8606 for each of us with our taxes in perpetuity as the basis will never drop to 0?

Since there is only a very small amount of basis left in each account, that results in about a $20 tax reduction, can I proceed with Cathy63's suggestion:
"If you're sure that your past tax returns are correct, you can ignore the basis going forward. You'll just be double-taxed on some of the money, but that's your choice to make. You do still have to file an 8606 if you do any Roth conversions, but you would just enter the basis in the tIRA as $0."

Since we do not plan to do any Roth conversions, will there be any repercussions if we don't file the 8606s after the 2023 tax season?

If you think I have left out any relevant information, please let me know.
Thanks.

 

[Buckeye]

As a complement to our workplace retirement plans we'd like to start contributing post-tax dollars to an IRA. Income limits prevent us from deducting and also prevent us from contributing to a Roth, and pro rata issues will prevent us from using a back door Roth as the instrument for this.


Tracking post-tax non-deductible contributions for the life of the tIRA for the purpose of not being taxed on the principal at WD seems.....tedious. Apparently the 8606 is used for this purpose, but I'd like to learn more before we start down this path.


If you have any good links or tips on the mechanics of contributing and tracking across a decade or more, I'd appreciate them.

I use TurboTax and she keeps track of it for me!

 

[fh2000]

I have a non-deductible IRA that I haven't made any contribution (or withdrawal) to since 2015. My last 8606 filed was for 2015. I have no other IRAs. My understanding was that since I had no IRA transactions I need not file 8606s for such years. My plan was to start re-filing 8606s when I begin making IRA withdrawals in several years. Have I been handling this correctly or do I need to file 8606s for each of the no-transaction years?

I use TurboTax. The retirement question/answer section asks about Form 1099-R received from brokerage firm for non-deductible IRAs. Form 8606 is generated for those years when I had Non-deductible contribution, and withdrawals; no form 8606 is generated for those years when no Form 1099-R received therefore no activities.

 

[Alan]

I have a non-deductible IRA that I haven't made any contribution (or withdrawal) to since 2015. My last 8606 filed was for 2015. I have no other IRAs. My understanding was that since I had no IRA transactions I need not file 8606s for such years. My plan was to start re-filing 8606s when I begin making IRA withdrawals in several years. Have I been handling this correctly or do I need to file 8606s for each of the no-transaction years?

You are correct. I concentrated on converting my IRA to a Roth so my wife made no contributions or withdrawals for several years and did not file any forms 8606. 2 years ago, after my Roth conversions were complete, she started doing her Roth conversions and used the basis last recorded on her 8606 from a few years ago. We will file an 8606 for her for tax years 2021 and 2022 then we will be done with 8606s for good.

 

[Alan]

My questions are what I believe can be answered with simple yes or no responses.

After our last traditional non deductible IRA is closed, is there a legal requirement to continue to file an 8606 for each of us with our taxes in perpetuity as the basis will never drop to 0? No

Since there is only a very small amount of basis left in each account, that results in about a $20 tax reduction, can I proceed with Cathy63's suggestion: Yes
"If you're sure that your past tax returns are correct, you can ignore the basis going forward. You'll just be double-taxed on some of the money, but that's your choice to make. You do still have to file an 8606 if you do any Roth conversions, but you would just enter the basis in the tIRA as $0."

Since we do not plan to do any Roth conversions, will there be any repercussions if we don't file the 8606s after the 2023 tax season? No, but when making IRA withdrawals you will be taxed on the whole amount

If you think I have left out any relevant information, please let me know.
Thanks.

My thoughts on your questions are in bold above. They may or may not be correct as I am just SGOTI

 

[SecondCor521]

Thank you for all the informative posts. From my perspective, I believe Cathy63 has come closet to addressing my question. Others have answered questions I didn't ask or didn't believe they has enough information. However, even with caveats, I don't see a simple yes or no answer to the question I asked - which is - once you close out a traditional non deductible IRA (meaning the account no longer exists) do you have to file an 8606 until your traditional deductible IRAs (you did not include the value of your contributions each year as part of your income) are all closed out or inherited.

Our situation is as follows:
1 traditional deductible IRA for each of us
1 traditional non deductible IRA for each of us (one closed and deactivated several years ago)
1 Roth IRA for each of us
8606s filed for each of us for every year there were any additions or withdrawals to all of our accounts

We understand the pro rata rule, which is why we file the 8606s. We have never done a conversion to a Roth and have no plans to do so.

We plan to withdraw all funds from the remaining traditional non deductible IRA in 2022 and will file an 8606 for that account at tax time in 2023.

My questions are what I believe can be answered with simple yes or no responses.

[1] After our last traditional non deductible IRA is closed, is there a legal requirement to continue to file an 8606 for each of us with our taxes in perpetuity as the basis will never drop to 0?

[2] Since there is only a very small amount of basis left in each account, that results in about a $20 tax reduction, can I proceed with Cathy63's suggestion:
"If you're sure that your past tax returns are correct, you can ignore the basis going forward. You'll just be double-taxed on some of the money, but that's your choice to make. You do still have to file an 8606 if you do any Roth conversions, but you would just enter the basis in the tIRA as $0."

[3] Since we do not plan to do any Roth conversions, will there be any repercussions if we don't file the 8606s after the 2023 tax season?

[4] If you think I have left out any relevant information, please let me know.
Thanks.

[Numbers added for reference.]

It seems you continue to think that there are deductible and nondeductible IRAs. There are not, as multiple people have said repeatedly.

For the sake of answering your questions, I'm going to assume a couple of things. If they're wrong, maybe you'll clarify or correct:

A. You and your spouse both have traditional IRAs (at least one).
B. You and your spouse's traditional IRAs both have assets in them.
C. You and your spouse's traditional IRAs both have basis in them
D. You and your spouse have been tracking the basis on Form 8606s which you have filed with the IRS.

Assuming all of the above:

1. There may be. There is a legal requirement to file Form 8606 if you perform any of the six (6) activities listed in the "Who Must File?" section of the instructions for Form 8606 at page 1 column 3 of https://www.irs.gov/pub/irs-pdf/i8606.pdf. The most common of these activities are (a) a nondeductible contribution to a traditional IRA, (b) a Roth conversion, or (c) a Roth distribution. So in your situation, the most likely scenario requiring you to file a Form 8606 would be if you took a distribution from either your or your spouse's Roth IRA. That would require completing Part III of Form 8606.

2. Probably. At a high level, there are really two reasons to file Form 8606: to achieve the tax benefits, and to comply with the law to avoid the penalty for not filing when required. If you don't care about the tax benefits, as @cathy63 and I have told you repeatedly, you don't have to file for that reason. The penalty for not filing when you're required to file is about $50 per form, and word on the street is that the IRS doesn't enforce the penalty. So it's up to you: If you're OK taking the risk of a $50 penalty and don't care about the tax benefits, then you can skip filing it.

3. To you? Probably not, as long as you don't do a Roth distribution or any of the other activities mentioned in answer 1. There is a small to minute risk of a small IRS penalty. And you'd be giving up some tax benefits, as we've mentioned. And if you took a Roth distribution your taxes would be technically incorrect if you didn't file it.

Also, since basis can be inherited, your IRA beneficiaries would lose the tax benefit of the remaining basis. Even if you don't care about it, they might. There is also a small psychological benefit to the beneficiaries to know what the remaining basis was and it was small and could be ignored if they chose.

4. See the assumptions I made listed above. If those aren't accurate, then my answers here might not be accurate or applicable.

 

[RE2Boys]

Thank you for all the informative posts. From my perspective, I believe Cathy63 has come closet to addressing my question.

Since there is only a very small amount of basis left in each account, that results in about a $20 tax reduction, can I proceed with Cathy63's suggestion:
"If you're sure that your past tax returns are correct, you can ignore the basis going forward. You'll just be double-taxed on some of the money, but that's your choice to make. You do still have to file an 8606 if you do any Roth conversions, but you would just enter the basis in the tIRA as $0."

Since we do not plan to do any Roth conversions, will there be any repercussions if we don't file the 8606s after the 2023 tax season?

If you think I have left out any relevant information, please let me know.
Thanks.

From a practical standpoint, Cathy 63's suggestions and statements are correct.

I (and wife) made non-deductible contributions to a TIRA in the years prior to Roth IRAs being available (1990's) Over time, we converted all of my wife's TIRA over to Roth's. I chipped away at converting my TIRAs to Roths but didn't make much progress as I would have had to pay taxes at a higher bracket and the market has done so well over the past ten years that the size of the TIRA kept increasing. Being very aware of the pro-rata rules resulted in not converting my 401k accounts to TIRA, I've been retired for over 20 years. Since I had to take my RMD in 2001, I had to complete the 8606 for the first time in at least 7 years. And I have the ability to make QCDs that count as part of the RMD but are not counted as a TIRA withdrawal for purposes of determining the portion of the withdrawal attributable to the basis (read line 7 of 8606).

Keeping track of the basis in an IRA is no ore complicated than keeping track of a carry forward a capital loss from year to year.

 

[beowulf]

Thanks, RE2. I have been using TurboTax for the past several years and it keeps track of everything that goes on the 8606 other than my year end TIRA balances. I agree that it's not hard to do and before I started RMDs I always did the calculations myself as I rarely withdrew any TIRA money.

 

[I am He]

I'd like to think that, today, it's common practice but maybe it is/maybe it isn't.

Our plan delineated post tax contributions. So when we rolled it out : x dollars were immediately rolled to a Roth. The CGs of that portion were added to the amount of the pretax dollars and rolled into a T-IRA. We discussed it a lot at the brokerage and at first was done incorrectly but I called and called until it was re-done correctly.

One 1099R form came out and one line was for the post tax dollars and the other for everything else with correct codes. Worked out.

 

[indiajust]

i used macintax/turbo tax since the early 90's. It saved all my forms as pdf docs. So I had all but one of the 8606 forms when I did nondeductible contribution rollovers to the Roth, tax free.

 

[tango2]

I did the 8606 for me and wife. Our contributions were less than 40000 apiece. It was more of a pia than worth it. Tax saved not much. You have to pro rate it every year. I finally gave up and just included it in trad Ira.