Tracking Your Basis in Your IRAPosted on December 16 2010 by admin
When I think of basis I think of a partner’s basis in a partnership, but basis can also apply to individual retirement accounts. The general rule is that distributions from a traditional IRA are taxable. There is, however, an exception to this rule. If nondeductible contributions were ever made to the IRA then not all amounts distributed would be taxable. This is when it becomes important to track the basis you have in your IRA. The cost basis of an IRA is the sum of any nondeductible contributions less any distributions of nondeductible contributions.
Form 8606, Nondeductible IRAs, is used to track the basis of a traditional IRA. This form should be filed every year that nondeductible contributions are made to a traditional IRA. The first year this form is filed the total beginning basis is zero. For each year after that, you’ll need to refer to the Form 8606 filed in the prior year to determine the basis at the beginning of the current year. As nondeductible contributions are made there is no tax impact, however, filing Form 8606 is important to later prove that distributions should not be fully taxable.
When distributions are taken from a traditional IRA Form 8606 must be filed again. The calculations on this form will determine whether or not the distribution is taxable based on the basis in the traditional IRA. The key is to track your basis so you can be sure that distributions are properly treated as either taxable or nontaxable.
Andrea Coury, CPA
There is nothing more complex than the world of taxes. We know this and yet we chose careers where we face these issues everyday. We get questions day in and day out about new tax laws, forms and news items and how they affect everyday people and businesses. Well, here at Henry & Horne we have set out to do what we do best; help everyday people understand what is going on in the world of state, local, federal, estate and international taxation. We will provide these weekly posts and we encourage you to give us feedback on those posts as well as letting us know what else you would like to know more about. Welcome to "Tax Insights." We hope you find this blog informative and worthy of your time.
Before posting a comment on a blog post please be aware that we do not give free tax advice to non-clients by email, comment response, or phone. Thank you!
- Traditional v. Roth IRAs and Other Retirement Options for the Self-Employed
- IRS Shuts Down E-File PIN Tool
- Tax Return Identity Theft – Not Just a Problem at the Federal Level
- Built-In Gains Tax
- Commuting Costs and the Home Office
- Gift Stock to Help a Loved One – 0% Rate Tip
- IRS Changes Partnership Audit Rules
- How to Access Frequently Requested IRS Records
- Documentation Requirements for Non-Cash Contributions
- IRS Tax Refund Offset Program Needs Improvement