Did Your Forget to Report Your 2014 IRA Contribution? Do It Now!

Tuesday, April 28, 2015

By Joe Cicchinelli, IRA Technical Expert
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If you made a traditional IRA contribution for 2014, you should have reported it to the IRS. If you qualified for a tax deduction, and you wanted to actually claim that deduction, then you should have reported it on your 2014 federal income tax return (IRS Form 1040). If you didn’t qualify for a tax deduction for your IRA contribution because you participated in a company retirement plan and your income was too high, then you should have filed IRS Form 8606 to report it as nondeductible.

So, what if you just now realized (after you already filed your 2014 taxes by April 15, 2015) that you forget to report it? You still should report it to the IRS.

The first thing you should do is figure out if you qualified for a tax deduction for some or all of your 2014 traditional IRA contribution. If you do qualify for a tax deduction, then you can file an amended tax return for last year to take advantage of the deduction. That deduction might increase the amount of the tax refund you received, or reduce the amount of taxes that you owed to the IRS.

If some or all of your 2014 traditional IRA contribution is not tax deductible, then you will have to file IRS Form 8606 to show the nondeductible contribution (which creates basis or after-tax money in your IRA). You might think that there’s no benefit to filing that form because you don’t get a tax deduction, so who cares? The IRS cares and so should you.

If you don’t file Form 8606 to report your nondeductible contributions, then there’s a $50 IRS penalty. But much worse than that, if you can’t prove you have basis, all of your future IRA distributions will be treated as being fully taxable instead of partially tax-free. It pays for you to file that form to report your nondeductible IRA contribution so later on, when you take a distribution from any of your traditional IRAs (including SEP and SIMPLE IRAs), you can claim part of your IRA distribution as tax-free. Under the pro-rata tax rules, when basis is distributed from your IRA, that basis will be tax-free.

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