Why It's Vital to Keep Track of IRA Contributions

Why It's Vital To Keep Track Of IRA Contributions

By KELLY GREENE
March 17, 2007;PageB2

Who keeps track of deductible versus nondeductible contributions to IRAs? Over 25-plus years, I am not sure of my records. And now that I am over 70½ years old, I have to take withdrawals. How do I treat these for income taxes?

--John King, Pittsburgh

I made a number of nondeductible contributions to my IRA in the 1980s while I was being transferred around the country. This resulted in different services doing my tax returns and not keeping track of those contributions. Since I no longer have copies of those returns, do you know of any way of getting a report from the IRS that tracks my contributions?

--Bill Miller, Bastrop, Texas

Having a record of your nondeductible contributions takes on new importance when you start making mandatory withdrawals from your individual retirement account at age 70½. That's because you don't have to pay tax again on contributions that weren't deductible in the first place.

But you can't cherry-pick the tax-free money in your IRA when you start making withdrawals. Instead, your nondeductible contributions "all come out pro-rata," says Twila Slesnick, an accountant in Loveland, Colo., and co-author of "IRAs, 401(k)s & Other Retirement Plans." To do the math, she explains, you divide the total value of your nondeductible contributions, also called your basis, by the total value of all of your IRAs. Then, you apply that percentage to your distribution amount to figure out how much of your withdrawal is tax-free.

If you've done your taxes correctly through the years and kept copies of your tax returns, you should have no problem pinpointing your total nondeductible IRA contributions. They are spelled out on Form 8606, which you are supposed to file as part of your tax return when you make such contributions, says Ed Slott, an IRA consultant in Rockville Centre, N.Y., and author of "Your Complete Retirement Planning Road Map."

You may recall that 1987 was the first year investors could make nondeductible contributions. Until then, all IRA contributions were deductible. But from that point on, they were no longer deductible if you participated in an employer-sponsored retirement plan and exceeded certain income limits. Although the IRS started requiring IRA investors to file Form 8606 as a record of their deductible and nondeductible contributions from the start, "a lot of people didn't realize they had to do it," Ms. Slesnick says.

What if you no longer have copies of 20-year-old tax returns? Or, what if you never filed Form 8606? There are a few ways to fix the problem, says Mr. Slott. If you have no tax returns at all, the Internal Revenue Service will sell copies of past returns back to you for $39 apiece, though those records may not reach back as far as you need. You can request copies by completing Form 4506, available at

If you didn't fill out Form 8606 in the past, the IRS could charge you a $50 penalty for each year that you made a nondeductible IRA contribution, Mr. Slott says. However, you generally can get the penalty waived if you explain that you handle your own taxes, didn't realize you were supposed to fill out the form, and have documentation to show that you made the IRA contribution but didn't take a tax deduction, he adds. To prove your earlier IRA contributions weren't deductible, you generally would need a tax return showing that you took no deduction -- along with proof of the contribution. That could come in the form of an IRA statement from your bank, brokerage or insurer holding the IRA, or another IRS form, 5498, which details IRA contribution information.

Once you've re-created a paper trail, you need to file a Form 8606 listing your cumulative nondeductible IRA contributions. That way, you can calculate the portion of your IRA withdrawal that is tax-free.