Advertisement
IRAs

Deductible Versus Nondeductible IRA Contributions

The type of contribution you make affects your tax bill when you withdraw the money or convert the account to a Roth.

Is there an easy way to find out which traditional IRA contributions my husband and I made in past years were tax-deductible? I can’t find evidence that we took any deductions for contributions, but my husband thinks we did in some years (our record keeping leaves a lot to be desired). I don’t want to get into trouble, but I don’t want to pay double taxes, either.

Advertisement - Article continues below

What you really need to track down are your nondeductible contributions, which will make a difference in your tax bill when you withdraw money or convert the traditional IRA to a Roth. All of your IRA distributions (and an entire Roth conversion) will be taxed unless you can show that you had made nondeductible contributions.

If any of the money in your IRAs had been rolled over from a 401(k) or other work-based retirement account, those contributions were likely pretax (unless your employer was one of the few that let you make after-tax contributions).

If you made any nondeductible contributions to your IRA, then you should have filed Form 8606 with your tax return for the year of the contribution. Each 8606 you file shows your cumulative nondeductible contributions, which is your tax basis in the IRA. If you don’t have that paperwork, then you’ll need to do some detective work.

Advertisement
Advertisement - Article continues below
Advertisement - Article continues below

Your IRA administrator doesn’t keep records showing whether your contributions to a traditional IRA were tax-deductible. However, the administrator can provide copies of Form 5498, which reports the amount of each contribution and whether it was for a traditional or a Roth IRA, says Ken Hevert, of Fidelity. You can then compare that information with your tax records to see whether you had taken a deduction in those years.

If you don’t have your old income-tax returns, you can order them from the IRS for $57 each using Form 4506.

After you solve the mystery, you will also need to submit Form 8606 to the IRS reporting the nondeductible contributions. You’re generally supposed to pay a $50 penalty if you didn’t file Form 8606 when you made the contributions, unless you can prove that the failure was due to reasonable cause.

If you didn’t file the required forms, Rande Spiegelman, vice-president of financial planning for Charles Schwab, recommends contacting the IRS, explaining your situation and asking about the best procedure. “I would file a separate Form 8606 for each year in which I failed to do so, then I’d just wait to see whether the IRS decides to assess a $50 penalty for each year,” he says. “If there was reasonable cause for not filing prior forms, you can always request an abatement of penalties.” You can find Form 8606 for prior years on the IRS Web site.

Advertisement

Most Popular

What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
Tax Changes and Key Amounts for the 2020 Tax Year
tax law

Tax Changes and Key Amounts for the 2020 Tax Year

Americans are facing a long list of tax changes for the 2020 tax year...and it's never too early to start thinking about next year's return.
June 22, 2020
10 Tax Breaks for the Middle Class
tax deductions

10 Tax Breaks for the Middle Class

Tax breaks aren't just for the rich. There are plenty of them that are only available to middle- and low-income Americans.
June 30, 2020

Recommended

8 Ways You Might Be Cheating on Your Taxes
taxes

8 Ways You Might Be Cheating on Your Taxes

Don't fall into these common traps that can get you in hot water with the IRS.
July 8, 2020
2020 Tax Deadline: When Are Tax Returns Due This Year?
tax deadline

2020 Tax Deadline: When Are Tax Returns Due This Year?

The April 15 deadline for filing your 2019 federal income tax return (and paying taxes) has been moved back...but the new due date is approaching fast…
July 8, 2020
Avoid Blindly Following Random Benchmarks on the Road to Retirement
retirement planning

Avoid Blindly Following Random Benchmarks on the Road to Retirement

Unless the benchmark is relevant to your personal plan, it could steer you into taking a wrong turn.
July 8, 2020
Where Should You Retire?
retirement planning

Where Should You Retire?

This week, our Your Money's Worth podcast host Ryan Ermey interviews co-host Sandy Block about her recent story about the best retirement destinations…
July 7, 2020