Form 8606 - Tax Liability on Non-deductible IRA Contributions

Grenouil

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Jan 17, 2004, 1:21:39 PM1/17/04

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I have two IRAs, one funded with deductible, and one with
non-deductible contributions.

I want to take a distribution equal to the total amount in
the non-deductible IRA, and was assuming that I would only
pay tax on the value of this IRA distribution above my
'basis'. However, form 8606 line 6 indicates that I need to
divide the distribution by the value of ALL my IRAs at the
end of the year, and only that portion is non-taxable.

What am I doing wrong?

PaulMaf

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Jan 17, 2004, 2:35:57 PM1/17/04

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>From: "Grenouil" gren...@bellsouth.net
>Date: 1/17/04 10:21 AM Pacific Standard Time
>Message-id: <H_eOb.14847$0t4....@bignews5.bellsouth.net>

The instructions on Form 8606 are correct.

You have to understand, you have one and only one IRA. You may have two
accounts, but only one IRA. IRA means Individual Retirement Arranagement, not
as most people erroneously believe, Individual Retirement Account.

Therefore, you do not have 1 IRA containing non-deductible contributions and 1
with deductible contributions. You ahve 1 IRA with both deductible and
non-deductible contributions.

Helen P. OPlanick EA

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Jan 17, 2004, 3:57:23 PM1/17/04

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You are doing nothing wrong. You have the picture down perfectly.
Helen, EA in PA
Member of The Tax Gang
President, PA Society of Enrolled Agents
Campaigning for NAEA Board of Directors - Looking for YOUR vote

Grenouil

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Jan 18, 2004, 12:00:08 PM1/18/04

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"Helen P. OPlanick EA" <helj...@aol.comnojunk> wrote in
message news:20040117155723...@mb-m01.aol.com...

So I end up paying tax on my non-deductible contributions?

Bruce E. Cobern

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Jan 18, 2004, 12:50:19 PM1/18/04

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"Grenouil" <gren...@bellsouth.net> wrote in message
news:uWyOb.21642$2L6....@bignews6.bellsouth.net...

> So I end up paying tax on my non-deductible contributions?
>

No. You use part of your basis now against the portion of your total IRA
value that you withdraw, and the rest remains as basis for the rest of your
IRA (the part in the account which you consider as not having had any
non-deductible contributions made to it.) So, whenever you take any
distributions from that remaining IRA account, a portion of them will not be
taxable, further reducing the basis that arose from you non-deductible
contributions.

--
Bruce E. Cobern, CPA
mailto:b...@pipeline.com

Criswell The Psychic Weatherman

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Jan 18, 2004, 5:33:59 PM1/18/04

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Grenouil wrote:

Absolutely nothing. No matter how many accounts you have, you
have exactly one IRA basis, not one IRA basis per account. All
of the accounts are considered as one. You withdraw taxable and
non-taxable contributions in proportion to each other. You
can't first take out the non-taxable portion and then the
taxable portion.
--
"A belief is not merely an idea the mind possesses;
it is an idea that possesses the mind." Robert Bolton
Criswell The Psychic Weatherman
sse...@mindless.com

PaulMaf

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Jan 19, 2004, 2:41:02 AM1/19/04

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>From: "Grenouil" gren...@bellsouth.net
>Date: 1/18/04 9:00 AM Pacific Standard Time
>Message-id: <uWyOb.21642$2L6....@bignews6.bellsouth.net>

>So I end up paying tax on my non-deductible contributions?

No! Read the instructions.

You cannot seperate and take out only your non-deduxctible contributions.

Once you have made non-deductible contributions to your regular (as opposed to
a Roth) any withdrawla you make will always be composed partly of non-taxable
not previously deducted ontributiosn ansd the rest all taxable.

The percentage will depend on the percentage your non-deductible contributions
not yet withdrawn bear to the total value of your IRA on 12/31 of the year
preceding the withdrawal.