As the tax rules governing Individual Retirement Accounts change over the years, it's easy to forget some of the more enduring ones, like recordkeeping requirements for nondeductible contributions. But retaining paperwork that shows the total traditional IRA contributions you were unable to deduct on your federal return can save you money. How? Nondeductible contributions are considered basis, so they're not taxable when you begin to take withdrawals.
This is true even if your IRA account is made up of both deductible and nondeductible contributions, though you can't choose which type to withdraw. Instead, your withdrawals are split between taxable and nontaxable amounts, based on a formula.
Another reason to keep track of nondeductible contributions: You receive the same tax-saving benefit when you convert your traditional IRA to a Roth.
Planning tip: Even if making a conversion is not possible now due to your adjusted gross income, a 2005 tax law provision offers relief in the near future. Beginning in 2010, the income restriction is repealed for Roth conversions.
Establishing the amount of your nondeductible contributions is the only way to avoid paying tax twice on them. You'll find the information you need on Form 8606, in your federal tax return.
If we can help you update your records, please call.
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E-Mail us at: finance@ClevelandSeniors.Com
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