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Author: hitmand Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75610  
Subject: non-deductible contributions through ignorance Date: 3/3/2001 4:48 PM
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hello everyone!

before i address my concern, i want everyone to know that i feel REALLY dumb right now. moreover, i tried to search the board somewhat to see if my concern(s) had already been covered. i did not see anything, but i wouldn't be surprised if i overlooked something.

so, PLEASE help me out if you can. here goes:

about 10 years ago when i was 20 yrs old or so, an insurance agent sold me a horrible investment instrument which was designated as a traditional ira. i contributed a small amount on a monthly basis. over the years i NEVER took the ira deduction because i did not know about it and i was never advised about it by this insurance agent. it should be also added that i was not making any substantial income to speak of, so i'm VERY confident that my modified agi would not have prohibited me from taking such an ira deduction over the years. AS SUCH, I WAS MAKING NON-DEDUCTIBLE CONTRIBUTIONS OVER THE YEARS THROUGH IGNORANCE (sadly, i did not even hear about a 8606 form until last tax season)....

SO, last tax season i completed form 8606 for the first time and wrote the irs a nice note explaining my ignorance the best i could. i further reflected my basis on the form.

i now have converted that ira to a roth (utilizing a more suitable investment). now, i obviously need to pay taxes on the taxable portion. since all of my contributions were non-deductible (through ignorance), it is my understanding that i simply need to subtract the total contribution amount (basis) over the years from the value of the traditional ira at the time of conversion. i also have the 1099-r reflecting the total distribution (conversion) amount.

here's my concern. as you all can tell, i'm a rookie with this stuff. so, i thought it would be prudent to consult a tax professional (h&r block in this case) to assist with my year 2000 tax filing. the h&r block person told me that "YOU CAN ONLY MAKE NON-DEDUCTIBLE CONTRIBUTIONS IF YOU ARE UNABLE TO TAKE THE IRA DEDUCTION". in my case, the h&r block person said that i owe taxes on EVERYTHING, because i MADE NON-DEDUCTIBLE CONTRIBUTIONS WHEN I WAS ABLE TO TAKE THE IRA DEDUCTION - ALTHOUGH UNFORTUNATE, I HAVE TO ESSENTIALLY PAY TAXES TWICE ON THE CONTRIBUTIONS....

i'm not sure that the h&r block person is correct. after all, i read in pub 590 for year 2000 returns (page 12 in ch 1 under the subsection "designating contributions as nondeductible" in the second paragraph of the same), the following extract:

"when you file, you can even designate otherwise deductible contributions as nondeductible contributions".

so, i'm a bit confused and concerned here. the good news is that we are not talking about a lot of money here (which further exemplifies the crappy investment). either way, i think that i will have a refund this year. however, i eagerly await your comments, help, advice, laughter, scorn or sympathy. any response would be appreciated and educational.

so, is the h&r block person correct in saying that only those people who can not take the ira deduction are permitted to make non-deductible contributions?


thanks so much!


the ignorant one
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Author: cfdunton One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28242 of 75610
Subject: Re: non-deductible contributions through ignoran Date: 3/3/2001 6:28 PM
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The sentence you quote seems to indicate that the H&R Block person is incorrect. I would go to a supervisor or manager at that office or at their district office and, if they tell you the same thing, insist upon seeing the tax code or tax court decision that supports what you were told. If all else fails, contact the IRS.

If you have time, let us know how this turns out.
Good luck.

Cf



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Author: hitmand Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28243 of 75610
Subject: Re: non-deductible contributions through ignoran Date: 3/3/2001 6:57 PM
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Cf,

thanks for your reply. i certainly did not feel that the h&r block person was correct. obviously, i am NO expert, but i have seen nothing that says that you MUST take an ira deduction if possible and that you are prohibited from making nondeductible contributions if you are able to take an ira deduction....

i really wonder if this person has been misleading other people with this misinformation....

at any rate, if i do have further contact with the h&r block organization regarding this matter, i will be more than happy to share the outcome with you.

thanks.

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Author: WPatch Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28246 of 75610
Subject: Re: non-deductible contributions through ignoran Date: 3/3/2001 11:28 PM
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"YOU CAN ONLY MAKE NON-DEDUCTIBLE CONTRIBUTIONS IF YOU ARE UNABLE TO TAKE THE IRA DEDUCTION". This was repealed by the Tax Relief Act "TRA" of 1997, at which time it was proper to designate non-deductible contributions for any open years. Thus, you could ammend returns for TY1995 and 1996 and file returns thereafter with elective non-deducted contributions.

Thus, I am certain it was kosher to file as you did from 1995 on, and suspect you could claim all the contrbutions. To do this you must file correct Form 8606's to show the cumulative non-deductible contributions.

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Author: hitmand Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28252 of 75610
Subject: Re: non-deductible contributions through ignoran Date: 3/4/2001 2:50 PM
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WPatch,

thanks for your reply. i greatly appreciate it.

i understand your position in regard to the contributions made from "1995 on". however, do you think that i would need to pay taxes essentially twice on the contributions made prior to 1995 in this conversion process?

i can't imagine that the irs would require you to pay taxes on previous "nondeductible" contributions just because you did not take a dedcution when you could have (as long as an effort was made to reflect said contributions on form 8606). but, i could be wrong.
again, we are talking less than $3,000 in contributions over the years.

once again, thank you for your help.

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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28254 of 75610
Subject: Re: non-deductible contributions through ignoran Date: 3/4/2001 3:35 PM
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hello everyone!

before i address my concern, i want everyone to know that i feel REALLY dumb right now. moreover, i tried to search the board somewhat to see if my concern(s) had already been covered. i did not see anything, but i wouldn't be surprised if i overlooked something.

so, PLEASE help me out if you can. here goes:

about 10 years ago when i was 20 yrs old or so, an insurance agent sold me a horrible investment instrument which was designated as a traditional ira. i contributed a small amount on a monthly basis. over the years i NEVER took the ira deduction because i did not know about it and i was never advised about it by this insurance agent. it should be also added that i was not making any substantial income to speak of, so i'm VERY confident that my modified agi would not have prohibited me from taking such an ira deduction over the years. AS SUCH, I WAS MAKING NON-DEDUCTIBLE CONTRIBUTIONS OVER THE YEARS THROUGH IGNORANCE (sadly, i did not even hear about a 8606 form until last tax season)....

SO, last tax season i completed form 8606 for the first time and wrote the irs a nice note explaining my ignorance the best i could. i further reflected my basis on the form.

i now have converted that ira to a roth (utilizing a more suitable investment). now, i obviously need to pay taxes on the taxable portion. since all of my contributions were non-deductible (through ignorance), it is my understanding that i simply need to subtract the total contribution amount (basis) over the years from the value of the traditional ira at the time of conversion. i also have the 1099-r reflecting the total distribution (conversion) amount.

here's my concern. as you all can tell, i'm a rookie with this stuff. so, i thought it would be prudent to consult a tax professional (h&r block in this case) to assist with my year 2000 tax filing. the h&r block person told me that "YOU CAN ONLY MAKE NON-DEDUCTIBLE CONTRIBUTIONS IF YOU ARE UNABLE TO TAKE THE IRA DEDUCTION". in my case, the h&r block person said that i owe taxes on EVERYTHING, because i MADE NON-DEDUCTIBLE CONTRIBUTIONS WHEN I WAS ABLE TO TAKE THE IRA DEDUCTION - ALTHOUGH UNFORTUNATE, I HAVE TO ESSENTIALLY PAY TAXES TWICE ON THE CONTRIBUTIONS....

i'm not sure that the h&r block person is correct. after all, i read in pub 590 for year 2000 returns (page 12 in ch 1 under the subsection "designating contributions as nondeductible" in the second paragraph of the same), the following extract:

"when you file, you can even designate otherwise deductible contributions as nondeductible contributions".

so, i'm a bit confused and concerned here. the good news is that we are not talking about a lot of money here (which further exemplifies the crappy investment). either way, i think that i will have a refund this year. however, i eagerly await your comments, help, advice, laughter, scorn or sympathy. any response would be appreciated and educational.

so, is the h&r block person correct in saying that only those people who can not take the ira deduction are permitted to make non-deductible contributions?


thanks so much!


the ignorant one


I would take the deduction and forget it. Why?

I think you are moraly correct (I know the IRS won't care)

You filed and explained the 8606 last year. No fraud.

The amount involved is small so the penality and interest will not be very high if the IRS does not agree with your position.


If you want you could refile a copy of last years 8606 with explaination, but I do not think I would.

I think this is what might be called a grey area in the tax field.

Their is a tax board you might want to post on.


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Author: WPatch Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28258 of 75610
Subject: Re: non-deductible contributions through ignoran Date: 3/4/2001 7:39 PM
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hitmand

i can't imagine that the irs would require you to pay taxes on previous "nondeductible" contributions just because you did not take a dedcution when you could have.

I agree. The law is on your side. Deduct all your non-deductible contributions.

Bill Patch

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