How to properly report earnings on Nondeductible IRA

Submitted by Chanchal Kariwala on Thu, 2025-02-20 16:36

When do I report earnings on Nondeductible IRA that has already been converted to Roth IRA?

  1. I made a nondeductible IRA contribution of $7000 to my traditional IRA account.
    • My traditional IRA account had a balance of $0 before this. I had done a total ROTH conversion previous year.
    • This is a fidelity account which put the cash into money market funds and accumulated dividends.
  2. I converted this to a Roth IRA a few days later. Since it had accumulated dividends and there is no limit on rollovers, I rolled over $7012.52.
  3. My question is about the additional $12.52. This is technically earnings which is not reported via 1099-DIV or 1099-INT. Do I need to report this income in Federal returns in 2024 and pay income taxes?
    • This is what I understood, is this correct?
      • Form 8606 Part 2 Line 16 should $7012.52
      • Form 8606 Part 2 Line 17 should be $7000
      • Form 8606 Part 2 Line 18 is 12.52
      • Form 1040 Line 4a is empty.
      • Form 1040 Line 4b is $12.52
    • Do I need to fill Part 1 of Form 8606?
  4. I received more dividends after the above conversion and have another $7.12 in this account which will keep receiving dividends. I cannot remove this from the IRA without penalties – so I plan to convert this to Roth in 2025 based on the tax implications from the above question.


Submitted by Alan - IRA critic on Thu, 2025-02-20 20:48

If you had a year end balance in the TIRA, it will result in the taxable portion of your conversion being a little more than 13.00. You should have a 1099R for 7013 if the conversion was done in 2024.

You need to complete Part I of Form 8606 to show your ND contribution of 7000 on line 1 and 3, assuming this was a 2024 contribution. Complete the rest of Part I including entering the 12/31/2024 balance of the IRA, although many tax programs will produce a worksheet to replace the rest of Part I.

Your Part II amounts are determined by the above math. I think the taxable amount of the conversion will be roughly 21.00 if you had a year end balance of 7.00

Form 1040, line 4a should be 7,013 and 4b should be the taxable amount determined by the above math.

You should convert the entire balance in the IRA after making your 2025 ND contribution.

Submitted by Chanchal Kariwala on Fri, 2025-02-21 14:06

Thanks Alan! I filled Form 8606 manually and the taxable amount is coming to $21.04.

Line 14 (This is your total basis in traditional IRAs for 2024 and earlier years) is coming out to be $8.51. What does this mean for next year? I still don’t entirely understand the meaning of basis for IRAs.

Submitted by Alan - IRA critic on Fri, 2025-02-21 15:03

Your completion of the 8606 appears correct.

Basis is the amount of non deductible contributions to your IRA which has already been taxed. Because your IRA generated 13.00 of gain before you converted and 7.00 after you converted, the Form 8606 math resulted in your using only 6991 of your 7000 basis and 21.00 was taxable. Therefore you have 9.00 left to carry forward to future years. This amount (from line 14 of the 8606) transfers to line 2 of your next 8606. Rounding in the 8606 can result in amounts differing by a dollar or two.

If you didn’t want to deal with the carryover basis, the IRS will not care if you don’t bother to carry it over to the next 8606 (line 2) because that works to the IRS’ benefit.

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