How do I reverse a non-deductible IRA Contribution?

Submitted by carlos mendez on Sat, 2023-03-11 16:59

Hello, I made a non-deductible IRA contribution in 2017 and in 2020 across several IRA’s at different brokerage firms. I’m trying to consolidate all my IRA’s as well as my 401k’s but I keep reading that I’ll have to make pro-rated distributions in the future in order to avoid double-taxation in the non-deductible portion I contributed. In hindsight I wish I would have never done it, but it is what it is. What’s the easiest way for me to reverse this and what are the tax implications? I’m 62 y/o. The original contributions have grown from $6k each to $20k over the past years.



Submitted by Alan - IRA critic on Sat, 2023-03-11 17:25

  • The only effective way to eliminate the IRA basis (from ND contributions) is to roll the pre tax value of all your IRAs into your current employer plan, then convert the remaining IRA basis to a Roth IRA tax free. In the following year you can probably roll the amount you rolled into the employer plan back out to your IRA and you will have an IRA that is 100% pre tax. But this is not possible if you are retired, or your employer plan will not accept IRA rollovers.
  • Have you filed 8606 forms for each year you made a non deductible contribution?  If not, the IRS will consider your entire IRA to be pre tax, and you will face double taxation eventually.
  • If your 8606 is up to date, then every distribution will be pro rated between taxable and non taxable amounts, also on Form 8606. This avoids any double taxation.
  • Consolidation of IRAs does not change your basis, since all your non Roth IRAs are treated as a single combined account for tax purposes. You could combine your accounts by direct transfers, and you would have fewer accounts, but your IRA basis would not change. Therefore, barring the pre tax rollover to an active 401k or similar plan, you are stuck with the non deductible contributions. Of course, if you do not want to deal with Form 8606 or pro rating, you could choose to not file the form, but you would eventually pay double taxes on your IRA basis.  A main factor here is exactly how much IRA basis you have that would be subject to double taxes.


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