Fixing a Common Problem with Non-Deductible IRAs

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ID-100702951Since 1987, individual investors who were not eligible to make deductible traditional IRA contributions have still been permitted to make non-deductible contributions.

The original allure of this opportunity is/was that it gives people an additional avenue to save for retirement on a tax-deferred basis. While the popularity of non-deductible IRA contributions waned with the advent of Roth IRAs, it was commonly employed by consumers from the late 1980s through the 1990s, and is still used sporadically today by investors whose incomes preclude Roth eligibility.


Per IRS rules, retirement distributions from non-deductible IRAs are taxed on a pro-rata basis with the percentage of the distribution that may be attributable to the IRA holders after-tax contributions being excluded from taxation. However, as described in an article I penned for NerdWallet last year entitled, Non-Deductible IRA Contributions Could Leave You Taxed Twice, many investors who made non-deductible IRA contributions were unaware that they are responsible for reporting them on IRS Form 8606 .

This form both documents the current year’s non-deductible IRA contribution and records the cumulative total of all such prior contributions. Fortunately, as outlined in the following articles, for many consumers it may be possible to correct this oversight –

Preparing late Form 8606 filings may require a bit of forensic bookkeeping, and readers are encouraged to enlist the expertise and assistance of a CPA, but the exercise may very well be worth the effort.  In addition to avoiding double taxation, for some investors, careful planning may enable tax-free Roth conversions of the non-deductible contribution amount.

John Robinson is the CEO and co-founder of Nest Egg Guru and the owner of Financial Planning Hawaii.  Nest Egg Guru is a retirement planning website that offers a new way to obtain meaningful answers to two of the most common and important financial planning questions – “How much will I have saved at retirement?” and “How long will my retirement nest egg last after I retire?”




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