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Author: hitmand Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121175  
Subject: unintentional non-deductible contributions Date: 3/4/2001 10:43 PM
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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.
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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 47679 of 121175
Subject: Re: unintentional non-deductible contributions Date: 3/5/2001 8:56 AM
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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.


Well, everyone's kinda correct and kinda not. The Block preparer is correct that you establish your previously-taxed basis in your traditional IRA by filing Form 8606. I can well understand why a paid preparer, who is liable for penalties for an improper return, would not prepare the return the way you want it prepared.

I'm not sure anyone knows how picky IRS is about this rule. If you have a record of all your contributions and copies of your returns showing you never deducted the contributions, I'd say go ahead and treat them as nondeductible contributions, resulting in the Form 8606 that you propose. It may not be right, and it might not stand up under an audit, but I think it's worth a shot. It's certainly not fraudulent or a flagrant disregard for the rules.

Phil Marti
VITA Volunteer

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Author: hitmand Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 47766 of 121175
Subject: Re: unintentional non-deductible contributions Date: 3/5/2001 8:55 PM
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hello phil!

thanks for your response. i've been back and forth with this thing for a couple of weeks now. i went to the irs web site at "www.irs.gov/help" and presented this situation in question form. an irs rep responded within 24 hours! the irs rep also disclosed her name, telephone number and employee id.

i pretty much said that i never took deductions on my ira contributions over the past 9 years and didn't file form 8606 until last tax season. i further advised that my ignorance was the culprit for this. i asked if i could use the contributions as my cost-basis to calculate the taxable conversion amount and report it all on Part II of 8606. i ended by asking if i had overlooked anything OR if there were additional things that i needed to consider.

the irs rep responded by saying that my analysis of everything was correct and reiterated that my mod agi needed to be less than $100k and gave some other info regarding basic conversion guidelines.

so, i guess i will treat my contributions as nondeductible.

once again, thanks for your response.

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