- Can You Make Non-Tax Deductible Contributions to an IRA?
- Traditional Roth IRA Conversions & Non-Deductible IRA Contributions
- How Much Can I Put in a Non-Qualified IRA?
- How to Make Deductible Contributions to a Rollover IRA
- What Contributions to an IRA Count for Federal Tax Deductions?
- IRA Contributions Effects on Income Tax Owed
Contributions to a traditional individual retirement account may be either deductible or non-deductible. Eligibility for deductible contributions depends on your income and participation in an employer retirement plan. Nondeductible contributions are treated differently when you withdraw from your traditional IRA, or convert it to a Roth. You may need to do some research to determine the amount of old IRA contributions that were nondeductible.
If you make any IRA contribution during the year, the trustee of the IRA account must send you documentation of the total of your contributions for the year on Internal Revenue Service Form 5498. This form also details if your contributions are traditional or Roth IRA contributions, the balance of the account, as well as your personal identifying information. While an important document, Form 5498 does not show if a contribution was deductible or non-deductible.
You are required to report all nondeductible IRA contributions on Form 8606. In addition, this form is used for Roth IRA conversions and Roth IRA distributions. Form 8606 includes calculations of the tax basis, or the total of all nondeductible IRA contributions. Each 8606 keeps a running total of all nondeductible contributions, so serves as proof that you have made nondeductible contributions. You should keep these forms indefinitely, but if you do not have copies, you can obtain copies of your tax transcripts from the IRS, detailing information on your previous returns, at no charge. You can request a transcript through the mail, by phone or online. If you used paid preparers to file your taxes, they can also provide you with copies.
Review your previous years tax returns with copies of your Form 5498s. If you have Form 5498s for any year that show that you made a traditional IRA contribution, but the corresponding yearly tax return does not show a deduction for the contribution, then you did not claim a deduction for the contribution. This, alone, does not classify the contribution as non-deductible.
If you did not deduct contributions to your traditional IRA and did not file Form 8606 declaring these contributions non-deductible for that year, then these contributions will be treated as deductible contributions. You will pay taxes on this money as income when you withdraw these contributions from the account. To correctly classify these deductions and avoid this double taxation, you will need to file Form 8606 for each year that you had nondeductible contributions and did not file. As of 2013, the IRS can impose a penalty of $50 for each year that you did not file a Form 8606 on time.