Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (3) | Ignore Thread Prev | Next
Author: hitmand Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: unintentional non-deductible contributions Date: 3/4/2001 10:43 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
hello everyone!

i posted this at the "retirement investment" board and it was suggested that i post here as well. i would appreciate any comments regarding the following:

in 1991 i bought an traditional ira that was invested in a poor performing instrument. the ira was sold to me by a young insurance agent. i was young and did not know that i could take deductions on my contributions. i made very little money and proceeded to contribute a small amount automatically on a monthly basis. since i made contributions in this
fashion, it is very easy for me to calculate my total contributions.

however, since i did not know about the opportunity of deducting the contributions, i was essentially making unintentional NON-DEDUCTIBLE contributions over the years. furthermore, i knew NOTHING about form 8606 until last tax season! last tax season i realized that all non-deductible contributions needed to be reported on form 8606. as such, i filed 8606 for the first time last year disclosing my unintentional non-deductible contributions over the years. i also wrote a note to the irs explaining my mishap.

this year, i converted this traditional ira to a roth.
as such, i need to calculate my taxable conversion amount. i went to h&r block for assistance to make sure i did the right thing. to my surprise, the h&r block agent told me:

"YOU CAN NOT TREAT YOUR UNINTENTIONAL NON-DEDUCTIBLE CONTRIBUTIONS AS BONA FIDE NON-DEDUCTIBLE CONTRIBUTIONS, BECAUSE YOU SHOULD HAVE TAKEN THE DEDUCTIONS OVER THE YEARS. THEREFORE, YOU CAN NOT USE YOUR UNINTENTIONAL NON-DEDUCTIBLE CONTRIBUTIONS AS YOUR COST BASIS. THEREFORE, YOU HAVE TO PAY TAXES ON THE ENTIRE DISTRIBUTION AMOUNT AS REFLECTED ON 1099-R".

i disagreed with the h&r block agent's assertion as i thought that you had a choice as to whether you took the deduction if your modified agi did not preclude you from taking the deduction. i further feel that the h&r block agent was incorrect due to the following extract from pub 590 for year 2000 returns:

"when you file, you can even designate otherwise deductible contributions as non-deductible contributions". (page 12 under subsection 'designating contributions as non-deductible' in the second paragraph)

we are only talking about approximately $2,600 on the conversion. i calculated my basis (by adding all of my unintentional non-deductible contributions over the years) at approximatley $2,500. as such, it is my understanding that my taxable conversion amount is approximately $100 and this should be reflected in Part II of form 8606 (this was a TOTAL conversion).

who is correct? the h&r block agent or me? if the h&r agent is correct, then i would be paying taxes on my contributions TWICE! i can't imagine the irs endorsing people paying taxes twice in such a scenario just because deductions were not taken on the contributions previously.

once again, i would appreciate any comments, advice or suggestions. this is the only thing that is holding up my 2000 year returns. this is becoming very worrisome.

sincerely,

hitmand.
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (3) | Ignore Thread Prev | Next

Announcements

Disclaimer:
In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement