Proving Post-Tax, Non-Deductible Contributions/Basis
I’ve made non-deductible contributions to my Traditional IRA since 2006. Each year I have filed form 8606 along with my tax return. Is this my “proof” to the IRS of my basis in my IRA? Assuming I convert my Traditional IRA to a ROTH, I would simply subtract my basis from the value of my Traditional IRA (as of the date of conversion) and split this amount as income equally in 2010 and 2012?
My second question is about a rollover I made from an old 401K to my traditional IRA back in 2007. I had made a very small ($362) post-tax contribution to my employer plan. This amount was disclosed on the 1099R that I received at year end; however, I don’t see this amount on my 2007 Form 8606. Should it have been? If so, is it worth correcting it? Is this $362 considered to be part of my basis?
Permalink Submitted by Alan Spross on Tue, 2010-04-06 18:35
Your 8606 is the form the IRS requires to document your basis. The underlying proof that your 8606 is accurate is a comparison of the 5498 the IRS receives each year from the IRA custodian with your tax return. That comparison would establish that you did make a contribution of a given amount AND did not deduct it.
Your statement for calculating the taxable amount of your conversion is correct if you convert all your TIRA balance. If you convert only a portion, then there are pro rate rules that calculate the taxable amount. This is calculated on Part I of Form 8606 when you do a partial conversion.
You rolled some after tax contributions from an employer plan distribution to your TIRA in 2007. For some unknown reason, the IRS does NOT want you to report that after tax rollover amount in the year you rolled over the funds, but in the year you take your next DISTRIBUTION from your TIRA. A conversion is a distribution. Therefore, all you have to do is report your $362 rollover on line 2 of Form 8606 for 2010. This is the same form you will use to report your conversion, and the $362 added to your basis will reduce the taxable portion of your conversion. If the method you use to file permits you do enter a notation, make the statement that your line 2 entry represents a rollover of after tax 401k amounts for 2007. This works out good for you because you do not have to file any retroactive forms if this will be your first distribution since 2006.
As for your regular non deductible contributions, the IRS can compare your 2007 1099R with the 5498 showing rollover contributions to the IRA custodian if they want to verify your 8606 information. As for not reporting this until a distribution is taken, there will be many more people who forget that they did one of these rollovers many years later in contrast to you, who was organized enough to recall that rollover. You will have saved yourself double taxation of the $362.
Permalink Submitted by Bill Barcheck on Tue, 2010-04-06 18:51
Excellent. Thanks much. This forum is the best resource I’ve found that answers real-life questions.