Don't Pay Taxes Twice
Keep track of nondeductible IRA contributions so you won't pay Uncle Sam more than you have to when you withdraw funds in retirement or if you convert to a Roth.
Contributing to a traditional IRA is a great way to lower your tax bill. Unfortunately, not everyone qualifies for this deduction.
You don't have to itemize to deduct the amount you contributed to an IRA (and reduce your adjusted gross income dollar for dollar). But your income has to fall below certain levels to write off the full amount of your contribution. (Learn more about IRA contribution and deduction rules for your 2010 tax return and the rules for 2011.)
If your income exceeds the limits for the tax break, you still need to keep track of your after-tax (nondeductible) contributions by filing a Form 8606 with the IRS, according to the March issue of Kiplinger's Personal Finance magazine. Here's why:
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Filing a Form 8606 the years when you make nondeductible IRA contributions will be important when it's time to withdraw funds or if you convert to a Roth. Money that was already taxed is excluded from your taxable distribution or the taxable portion of the amount you convert on a pro-rata basis. For example, if you convert a $100,000 traditional IRA to a Roth and you made $10,000 in nondeductible contributions, 10% of the converted amount would be tax-free.
What if you haven't submitted the required form with your returns? You're in good company. Most people have never heard of Form 8606. You can file a form for past years and, although there's a $50 penalty for failing to file, it may be waived for reasonable cause. Call the IRS to explain your situation and ask how to proceed. Then, depending on how much money is at stake, you can decide whether it's worth the hassle of documenting earlier after-tax contributions.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Award-winning journalist, speaker, family finance expert, and author of Mom and Dad, We Need to Talk.
Cameron Huddleston wrote the daily "Kip Tips" column for Kiplinger.com. She joined Kiplinger in 2001 after graduating from American University with an MA in economic journalism.
-
The Rule of $1,000: Is This Retirement Rule Right for You?
The rule of $1,000 a month can estimate how much you need to save for retirement. But it assumes an aggressive withdrawal rate.
By Adam Shell Published
-
25 Financial Moves to Consider Before December 31
Tidying up your financial house before the New Year kicks off will put you in a great position to have a financially satisfying and successful 2025.
By Jonathan I. Shenkman, AIF® Published
-
Skip the Sales Tax
taxes Save money back-to-school shopping in 17 states with sales tax holidays this summer.
By Rivan V. Stinson Published
-
What to Do If Someone Files a Tax Return in Your Name
Scams Take these steps if you think you're a victim of tax fraud.
By Cameron Huddleston Published
-
2014 Sales Tax Holidays for Back-to-School Shopping
Tax Breaks You can shop tax-free for clothing, computers, school supplies and more on certain days in these 16 states.
By Cameron Huddleston Published
-
How I Dodged a Phony IRS Tax Scam
Scams Here's what I did to avoid becoming a victim when someone called and tried to rip me off.
By Cameron Huddleston Published
-
Traveling? Better Budget for Taxes
Travel You’ll pay plenty for hotels, rental cars and restaurant meals.
By Sandra Block Published
-
IRS Warns of E-mail Tax Scam
Scams Watch out for bogus e-mails claiming there's a problem with your 2013 tax return.
By Cameron Huddleston Published
-
IRS Has $760 Million in Unclaimed Refunds
taxes Here's how to find out if you're owed money and how to claim it.
By Cameron Huddleston Published
-
How to Avoid Tax Scams
Scams Take these steps to lower your risk of becoming a victim of fraud or identity theft during tax season.
By Cameron Huddleston Published