Traditional IRA Basis

Your traditional IRAs may have a basis if you ever made any regular, annual contributions, not including rollover contributions, to any traditional IRA and you could not deduct the contributions in the year the contributions were made.

For example, in 2004 you contributed $3,000 to your traditional IRA. However, since you had a 401(k) plan at work (meaning that you were covered by a retirement plan at work), you filed a joint return, and your modified adjusted gross income was $70,000, you could only deduct $1,750 of the $3,000 contribution. You could not deduct the remaining $1,250. This $1,250 becomes your basis and is entered on line 1of Form 8606.

Form 8606 was required to be filed every year that a nondeductible contribution was made to a traditional IRA.

Do not count a rollover contribution as a nondeductible contribution even though you did not deducted it when you rolled it over.

For example, in 2005 you had $10,000 in your 401(k) at work. Then you changed jobs, and you rolled the $10,000 from your 401(k) into your traditional IRA. You cannot deduct this $10,000 as a contribution. However, even though you could not deduct the $10,000, it is not considered to be part of your basis. Your basis in your traditional IRA remains $1,250, your nondeductible contribution from 2004.

All traditional IRA accounts are treated as one account. The basis is the total basis for all traditional IRA accounts combined. Theoretically, your contribution account has a basis of $1,250 and your rollover account has a basis of zero. But basis is not tracked for accounts individually, but for all accounts combined. If you take a distribution from the rollover account, the basis to use is $1,250, not zero. So, if you take a distribution from a traditional IRA, it does not matter which account the distribution comes from, the basis is still the same.

If you take a distribution from your traditional IRA. your basis is NOT the amount of your distribution NOR is it the value of your traditional IRA. If you deducted all of your contributions (other than rollover contributions) to your traditional IRAs, YOUR BASIS IS ZERO. If you have a traditional IRA basis and take a distribution, part of the distribution comes from the basis and is not taxable. This is calculated on Form 8606 and will reduce your basis going forward.

Comments (5) Leave your comment

  1. How are retirement roll-over funds(e.g. from a
    401(k) plan) figured into calculating the “total
    basis in a traditional IRA”- i.e. Line 2 on Federal
    Form 8606?

  2. Errors were made over the years and my true basis for nondedductible IRA is approximately $20K more than reported on last form 8606. My records go back to 1991. How do I correct the nondeductible basis and is it worth the hassle?

  3. Line 2 of form 8606 is more important than you think as it will track the SUM TOTAL of all non-deductible IRA contributions you have made since you started paying taxes. Remember, your ira is non-deductible in years where your income exceeds that year’s deductibility limit. You must therefore keep 1040 forms for every year you have ever paid taxes, you must keep all your 5468 forms that ira custodian sends you showing how much ira contrib you made (will not show whether it’s non-deductible as this is not custodian’s responsibility), and you must keep all your forms 8606.
    Line 2 grows every year to LET IRS know the sum total of your non-deductible IRA contribs. It will be important when you turn 70 1/2 and are required to make distributions and pay taxes. You will calc RMD as normal but pay taxes on a prorated amount of RMD based on ratio of basis/total ira amount.

  4. Wow. Now I’m supposed to fish back through tax records since 1992 to see if I ever filed a form 8606. I regret ever contributing anything to any IRA. What a debacle.

  5. I filed an 8606 each year I contributed to an IRA. But I am now retired and can no longer contribute to an IRA. Do I still have to file an 8606 for the IRA’s that are not touched now, or just hang onto my old form to use when I do tap the IRA?

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