nondeductible IRA question – Form 8606
I made a nondeductible contribution of $6k to a TIRA and then converted it to a RIRA. I filled out Form 8606 and paid tax accordingly. Now I received a Form 1099 from the mutual fund showing a distribution to me of that $6k. Ordinarily such a distribition as reported on a 1099 would have to be added to my adjusted gross income. But I already paid some taxes on it via the Form 8606. Ity appears to me that I will be double taxed. Do I ignore the 1099? What am I missing?
Thank you.
Permalink Submitted by Alan Spross on Wed, 2012-02-08 21:44
Douglas,
If this was your only TIRA, the 8606 reporting the non deductible contribution would result in your conversion being non taxable.
However, if you have other TIRA accounts then they all must be taken into account in determining how much of your conversion would be taxed. Pro rating would apply. If you had another TIRA worth 54k and your only non deductible contribution was this one for 6k, then only 10% of your TIRA is after tax and your conversion would only be 10% tax free.
You never get taxed on the 6k contribution again, but these pro rate rules mean that you would have to convert all your TIRAs in order to get that 6k into your Roth tax free. So if the 6k was your only TIRA, you get the entire amount into a Roth tax free.
The 1099R will always show 6k as taxable, but the IRA custodian does not know how much is taxable. That’s why they should also check the Box “Taxable amount not determined” on the 1099R. The actual taxable amount is determined on the 8606 reporting the conversion.
Permalink Submitted by ROLAND MARIANO on Wed, 2012-02-22 22:56
Hello,
I hope I am in the correct topic…
How is the basis transferred from a non-deductible IRA wherein it is bequethed to the surviving spouse? What happens to that basis? Does it remain the same?
Please advise.
Roland Mariano, CPA
Permalink Submitted by Alan Spross on Wed, 2012-02-22 23:26
Yes, if the surviving spouse does a rollover to their own IRA the surviving spouse inherits the unrecovered basis on decedent’s Form 8606 on the line showing the total remaining basis. The spouse would add that basis to any basis the surviving spouse had in their own IRA. The best way to do that is probably to add it on line 2 of the next surviving spouse’s 8606 with an explanatory statement where the basis came from.
If the surviving spouse chooses to maintain the IRA as inherited, then the basis in it remains separate. If the spouse also has basis in their owned IRA, a separate Form 8606 would be needed for each.
Permalink Submitted by ROLAND MARIANO on Fri, 2012-02-24 13:24
Thank you, Alan. Just to clarify…you say to combine the IRA basis of the decedent with the surviving spouse on Form 8606, but isn’t the second statement you make contradicts your practicals suggestion? Both husband and wife had identical 8606 over the years attributed to non-deductible IRA contributions. I am confused when you say “separate Form 8606 would be needed” ‘when the husband has inherited (bequethed to him) his deceased wife’s IRA basis.
Thank you.
Roland
Permalink Submitted by Alan Spross on Fri, 2012-02-24 17:21
Separate 8606 forms and basis must be maintained only as long as the inherited IRA remains titled as an inherited IRA.
Combining the basis occurs only when the surviving spouse assumes ownership of the inherited IRA and the IRA is no longer titled as an inherited IRA. At that point the inherited basis is combined with any basis already owned on a single 8606.
So basis is combined only after ownership is assumed. Before that the separate 8606 forms must continue, one for the inherited IRA and one for the originally owned IRA. These 8606 forms would now be under the same SSN so they would have to be labeled as to which one applied to the inherited IRA and which one to the owned IRA.
Permalink Submitted by Vic Parikh on Tue, 2015-04-28 18:34
My wife’s (never worked) and her entire IRA contribution was in Nondeductible IRA account. I had contributed for her after tax. I always submitted Form 8606 from 1988. Balance Contribution of about $17K grown to around $112K. After 70 1/2 next year. when she takes her RMD in 2016-2017 year will it be totally tax free? in Joint Tax reurn filing?
Permalink Submitted by Vic Parikh on Tue, 2015-04-28 18:36
My wife’s (never worked) and her entire IRA contribution was in Nondeductible IRA account. I had contributed for her after tax. I always submitted Form 8606 from 1988. Balance Contribution of about $17K grown to around $112K. After 70 1/2 next year. when she takes her RMD in 2016-2017 year will it be totally tax free in Joint Tax return filing?
Permalink Submitted by Alan - IRA critic on Tue, 2015-04-28 20:38
Only the pro rated distribution reflecting her % of basis (the 17k) is tax free. Since most of the IRA balance is growth, then most of the RMD will be taxable. With the figures you posted, about 15% of any distribution will be tax free. Her distributions must also be reported on Form 8606 and the form will calculate the exact taxable amount.