roth vs non-deductible IRA

Submitted by Richard Stumpf on Mon, 2020-12-21 17:57

Client has been funding a roth for many years. He has been telling his accountant that he was funding a non-deductible IRA, not realizing that there is a difference between Roths and non-deductible IRAs. CPA has been keeping records on a non-deductible IRA, cost basis, etc. Client’s income has pretty consistently been right at the cut off point for funding Roth’s. For example, 2019 was about $1,000 less than the cutoff point. But I’m sure some years were over the cut off point as well.

Is our only option to fix this to go back for 20 years and look at each year and adjust account balances as appropriate? It’s been in a fairly actively traded account, so assigning gains and losses is going to be a major endeavor. Or should we just flip the entire account to non-deductible, since the accountant has kept records that way? Easier to do, but loses a major tax break for the client.



Submitted by Alan - IRA critic on Mon, 2020-12-21 19:14

  • If these contributions have been made to a TIRA that was not deducted on the tax return, Form 8606 should be filed for each such year starting with the oldest year, since these forms are cumulative. The problem is that most CPAs that are told of TIRA contributions will report the maximum amount as deductible and will file a Form 8606 for the difference. Years prior to 2017 are now closed tax years, so the only thing that can be done is to be sure that an 8606 was filed for all contributions that were not actually deducted.  Gains and losses are immaterial to this process.  If an 8606 was not filed, it can be filed retroactively and will not affect the rest of the return up through 2016. If a Roth contribution was made instead, there could be excess Roth contributions to correct due to income.
  • This is an even larger mess if distributions have been taken from these accounts. Only returns after 2016 can be amended if an amended return is called for, eg if a deduction can be taken or if a Roth contribution was made but reported as a TIRA contribution.
  • 2020 contributions can still be recharacterized to a different type of IRA if needed.
  • In short there could be different infractions made from one year to the next. Alot depends on what tax records the client and the CPA have retained, but this could turn into a very time consuming reconstruction process. A back door Roth only makes sense if there are no pre tax dollars in the TIRA.

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