Over at Bogelheads we came across the following discussion:
how to use non-deductible TIRA contributions
by Naikansha » Mon Feb 03, 2014 8:04 pm
Last year I submitted IRS forms 8606 (Non-deductible IRAs) establishing non-deductible contributions to traditional IRA accounts for nine years. These forms were submitted to show my total basis, as last year I took my first Required Minimum Distribution. These non-deductible contributions were substantiated by mutual fund statements as well as 1040 tax forms. IRS accepted these 8606 forms with no comment.
The question now is, how is the total basis in the final year's form to be used (by me or by the IRS)? Does the IRS allow the total amount to be deducted from a single year's RMD (from which tax would be normally taken)? Is a credit or refund given if Vanguard takes taxes out of the full year's amount ? What if the basis is larger than a particular year's RMD?
I hope some of the tax experts here have some ideas, as my own tax advisor said I should ask Vanguard, but they did not know and contrary to his advice, said they do not keep records stating which contributions were taxable and which non-taxable. Thanks for any help.
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Joined: 9 Nov 2010
Re: how to use non-deductible TIRA contributions
by DSInvestor » Mon Feb 03, 2014 8:23 pm
Form 8606 is used to track IRA basis for contributions as well as for withdrawals and Roth conversions. When you withdraw you cannot cherry pick the basis and consume it all in one year. The only way to consume all IRA basis in one year is to fully withdraw the entire amount of your Traditional IRA, SEP-IRA, SIMPLE-IRA, Rollover IRAs. IRS views all of these IRAs as one big Traditional IRA. Assuming you're withdrawing to satisify RMD, you're making a partial withdrawal. For partial withdrawals, your IRA basis must be prorated. The prorata calculation to determine the taxable and non-taxable portions of your IRA distributions/conversions is done in lines 6-15 in form 8606.
Let's say you have 50K IRA basis and Traditional IRA is 500K. If you withdraw 50K (partial withdrawal), the basis is prorated. The withdrawal is 10% of total so 10% of basis will be used. 5K will be non-taxable, 45K will be taxable. Form 8606 calculates this and you will have 45K IRA basis to carryforward to next tax year. For the purpose this calculation, IRS looks at the IRA balance of all Traditional IRA ,SEP-IRA, SIMPLE-IRA, Rollover IRA on Dec 31 of the tax year.
You will need to continue to file form 8606 every year to track the IRA basis after your IRA distributions.
Vanguard cannot give tax advice and they definitely do not know if your IRA contributions were deductible or non-deductible because that depends on your tax return and they don't have that. Your tax advisor should have your tax returns and should have been filing 8606 forms every year for those 9 years that you made non-deductible contributions.
If you're considering converting some Traditional IRA assets to Roth IRA be aware that Roth conversions do not satisfy RMD. You must take your RMD first, then whatever is left in the Traditional IRA after RMD can be converted to Roth. IRA conversion is handled by the same lines 6-15 to determine taxable and non-taxable portions.
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Joined: 4 Oct 2008
Re: how to use non-deductible TIRA contributions
by JW Nearly Retired » Mon Feb 03, 2014 10:05 pm
Naikansha,
DSInvestor has covered it very well.
I would just add the suggestion that you find a new tax advisor. This one doesn't know much about taxes.
JW
Retired Summer 2013
Posts: 3361
Joined: 16 Dec 2007
Re: how to use non-deductible TIRA contributions
by Naikansha » Mon Feb 03, 2014 10:09 pm
thanks to you both for your help.
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