Traditional IRA Basis

Tax Tips

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.