Keeping Track of Nondeductible IRA Contributions

In a comment to Monday’s post, David raises a question about keeping track of non-deductible contributions to a traditional IRA. He asks if his IRA manager should be expected to keep track of this for him.

The short answer is “no.” Your IRA trustee or custodian—or for that matter, any other financial institution involved with your IRA, such as an investment advisor or mutual fund company—is not obligated to keep track of your nondeductible contributions. Not only are they not obligated to do this, they can’t do it, since the facts that determine whether a given IRA contribution is deductible or not is beyond their knowledge. They don’t know about your status as an active participant in your employer’s retirement plan; nor do they know your AGI. So if you think you’ve lost track of your nondeductible contributions, you can’t look to them for help.

(By the way, the rules for determining whether a traditional IRA contribution is deductible or not—which are way more complicated than they need to be—are summarized in February 14’s post.)

But wait! All is not lost! The only one who can keep track of your cumulative nondeductible traditional IRA contributions is you. And chances are pretty good you’ve done so, even if you don’t remember. Here’s why. Whenever you make a nondeductible traditional IRA contribution, you’re required to file a Form 8606 with your tax return for that year. And that form picks up your cumulative nondeductible contributions from prior years and makes you keep a running total. So all you have to do is find your tax return from the most recent year in which you made a nondeductible contribution, and, voila!, there it is. You don’t have to comb through all prior years’ returns—just the most recent one.

And then when you start taking distributions later in life, the same Form 8606 helps you (actually, makes you) keep track of how much of your distribution is tax-free, and how much you have left to recover tax-free in later years.

If you can’t find your tax return for the year you last made a nondeductible contribution, all is not lost. Maybe your accountant kept a copy. Or if you used tax preparation software, maybe the software kept track of it on your computer. I know from personal experience that Turbo-Tax keeps a running record of it, and carries it forward from year to year.

One other point David raised that I want to touch on. In his comment he asks if he should have expected his IRA manager to have “segregated” his nondeductible contributions. Segregating your nondeductible contributions is neither necessary nor at all helpful. That’s because, as described in February 15’s post, when it comes time to take distributions and enjoy some tax-free distributions, IRS rules force you to aggregate all your traditional IRAs in figuring the amount that’s tax-free. Segregating them into one IRA does you no good.

’Til manana.