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Please help. I'm confused. What happens if several years ago contributions were made to a traditional IRA account but never deducted on the tax returns? It's been over 4 years so I guess it's too late to ammend them. Now my mother (age 63) withdrew the funds and they appear to be fuly taxable as current income. This equals double taxation on the money ($12,000). Right?

As Ira noted in an earlier response, nondeductible contributions are not taxed again upon withdrawal from the IRA. Your problem is that it appears that the rules for reporting nondeductible contributions were not followed.

If one can make deductible contributions to an IRA, one can choose not to deduct those contributions. However, one is supposed to file Form 8606 to report those nondeductible contributions and, thus, establish the basis in the traditional IRA. I don't know whether this is a formal "election," a term of art in tax law, which requires an entry on a return.

I think I'd be willing to take a shot at treating your mother's undeducted contributions as if they had been properly reported, assuming that they can be proved with copies of her returns showing no deductions. I don't know whether the issue has ever been litigated, but I do know that to do so would leave the government in no worse position that it would be had the contributions been properly reported.

If there is a basis of undeducted contributions to a traditional IRA, the taxable portion of any distribution is computed in Part I of Form 8606.

Phil Marti
VITA Volunteer
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