Tax Filing Requirements for Non-Deductible IRA Contributions

When contributing to an Individual Retirement Account (IRA), not all contributions are tax-deductible. If you have made non-deductible IRA contributions, it’s essential to understand how to report them correctly on your tax return and maintain proper records to avoid unnecessary taxes in the future.

Tax Filing Requirements

If you made non-deductible contributions to a traditional IRA, you must report them to the IRS using Form 8606, Nondeductible IRAs. This form serves as an official record of your after-tax contributions and ensures you do not pay taxes on the same money when you take withdrawals in retirement. Here’s what you need to know:

1. Filing Form 8606:
   • Attach Form 8606 to your annual tax return (Form 1040 or 1040-SR) when you file your taxes.
   • If you fail to file this form, the IRS will assume that all withdrawals are taxable, which could lead to unnecessary tax liability.
2. Tracking Basis in Your IRA:
   • The total amount of non-deductible contributions forms your IRA basis. This is the portion of your IRA that won’t be taxed when withdrawn.
   • Each year you contribute non-deductible funds, you must update your basis using Form 8606.
3. Taxation of Withdrawals:
   • When you withdraw funds from your traditional IRA, a portion of your withdrawal is tax-free if you have a non-deductible basis.
   • The formula used to determine the tax-free portion considers the total IRA balance and the proportion of non-deductible contributions.
4. Backdoor Roth Conversion Filing:
   • If you convert a traditional IRA (with non-deductible contributions) into a Roth IRA through a backdoor Roth conversion, you must also report this on Form 8606.
   • The conversion amount is reported in Part II of Form 8606.
   • If your traditional IRA contained pre-tax funds, a portion of the conversion may be taxable.
   • The pro-rata rule applies, meaning if you have both pre-tax and post-tax contributions, the taxable portion of the conversion is determined by the ratio of these amounts in all your traditional IRAs.

Failing to properly report non-deductible contributions or Roth conversions could result in paying taxes twice—once when you contribute and again when you withdraw.

The Importance of Good Record Keeping

Keeping detailed records of your IRA contributions is critical to ensuring you do not overpay in taxes. Here are some tips for maintaining accurate records:

1. Use a Spreadsheet
   • A Google Sheet or Excel spreadsheet can help track yearly contributions.
   • Create columns for year, contribution amount, deductible vs. non-deductible status, conversion amount (if applicable), and cumulative non-deductible basis.
2. Retain Tax Forms
   • Keep copies of Form 8606 from each year you file.
   • Retain Form 5498 (IRA Contribution Information) from your financial institution, as it confirms your total IRA contributions.
   • Maintain documentation of any backdoor Roth conversions, including transaction confirmations from your IRA provider.
3. Store Digital and Physical Copies
   • Save digital records in cloud storage (Google Drive, Dropbox) to ensure accessibility.
   • Keep hard copies with your tax records for at least seven years in case of an audit.
4. Consult a Tax Professional
   • If your IRA situation is complex, consider consulting a tax advisor to ensure proper filing and record-keeping.

Proper reporting and tracking of non-deductible IRA contributions and backdoor Roth conversions can prevent costly mistakes. By consistently filing Form 8606 and maintaining a clear record of contributions and conversions, you can ensure you maximize your retirement savings while avoiding unnecessary tax burdens.

Please contact us if you need assistance on this topic or are not sure if you made a non-deductible IRA contribution for the 2024 tax year.