untangling pre-1987 from 8606
Client, age 60+, had a pre-1987 Traditional IRA. In 2005, a first 8606 was filed to document a new non-deductible TIRA contribution to another trustee account. With that filing, the pre-1987 contribution was entered as the pre-2005 basis. In hindsight, that appears to be incorrect. Further, the pre-1987 IRA including gains was rolled over via direct-transfer to the 2nd trustee in 2006; no 8606 or other IRS reporting was done for that transfer (was any required?).
Assuming 8606 corrections are required because there is currently no 8606 on file with the IRS showing a $0 basis, are client-maintained records for the original purchase and other transactions sufficient to avoid tax on future distribution of the pre-1987 amount?
Thanks-
Permalink Submitted by Alan Spross on Thu, 2010-09-30 21:02
I may be missing your central question, but prior to 1987 all TIRA contributions were fully deductible, at least for federal purposes. It sounds like the 2005 8606 overstated the basis for client’s TIRA and there will be penalties if the overstatement is not corrected before distributions start. The correction procedure would be to file stand alone corrected 8606 forms starting in 2005 and updating those that existed after that year so that the latest 8606 accurately reflects the current basis.
All client’s IRAs are aggregated and there is no separation possible for pre 87 accruals as there is with employer plans. Pro rate rules apply over all client’s IRAs and the 8606 on file should reflect the current basis for these IRAs. It should be easy to file amended forms unless client has taken distributions in the interim and applied an incorrect amount of basis. In that case, the current basis would have to be equitably constructed in some fashion, possibly involving amended returns for years that have not been closed.
Permalink Submitted by Paul Monaghan on Thu, 2010-09-30 23:14
I apologize for my misleading question and I understand your reply. Fortunately, there have been no distributions and filing the corrected 8606s should clear things up.