No. of Recommendations: 6
Just my annual complaint about the IRS formula for determining how much of my non-deductible IRA contributions I can recover each year. After 13 years of IRA distributions I still have 60% of my non-deductible contributions left in the IRA. It happens that it also took me 13 years to make those contributions.

For 2012 I was able to claim 2.2% if my IRA distribution as recovery of non-deductible contributions. Based on the current total value of my IRA in 2013 only 2% will be allowed as recovery of non-deductible contributions. And if my investments continure to do well, which I hope they will so I don't run out of money, that percentage will get smaller in the future.

I understand Congress and IRS didn't want someone taking completely tax free distributions in any year. But the current calculation means you can never recover all your non-deductible unless you completely exhaust your IRA. When I'm 100 years old there will still be unrecovered non-deductible money in the IRA.

Something ought to be done to fix this but I don't see it happening. Not enough people in this situation and no interest by Congress or IRS in speeding up the recovery process. Heck, even Republicans don't give a damn about it.

Okay, done ranting for another year. Thanks for listening.
Print the post Back To Top
No. of Recommendations: 1
Just my annual complaint about the IRS formula for determining how much of my non-deductible IRA contributions I can recover each year. After 13 years of IRA distributions I still have 60% of my non-deductible contributions left in the IRA.

I'm a little surprised that some people actually made non-deductible contributions to a traditional IRA. I couldn't find a compelling reason to do so.

Ratio ~
Print the post Back To Top
No. of Recommendations: 0
RatioFool writes,

I'm a little surprised that some people actually made non-deductible contributions to a traditional IRA. I couldn't find a compelling reason to do so.

It made sense during the Reagan years for a short period when dividends and capital gains were taxed the same as W-2 income.

intercst
Print the post Back To Top
No. of Recommendations: 3
RatioFool writes,

I'm a little surprised that some people actually made non-deductible contributions to a traditional IRA. I couldn't find a compelling reason to do so.

It made sense during the Reagan years for a short period when dividends and capital gains were taxed the same as W-2 income.

intercst


---------------------

Back when I worked for a Fortune 200, I maxed out the 401k contribution every year. They matched the first six % but I was putting I think 16% in. Usually that meant sometime in October I would hit the max dollar limit for pre-tax 401k contributions. Payroll would send you a form to elect stopping contributions for the remainder of the year or continuing but using after tax dollars.

I always elected to keep adding after tax money for the last 4 or 5 pay periods each year. So when I left the company and rolled the 401k to a self directed IRA, these after tax dollars traveled to the rollover IRA. So like the OP stated, I lament form 8606 and having some of my after tax dollars locked in until the IRA is exhausted.

On a more disturbing topic, I noted this years form 8606 has a place for you to report the basis for your Roth IRA. This is new. The section of the 8606 only kicks in if you make a Roth withdrawal (not me) but it looks like when you do, you have to compute and report the Roth basis to Uncle Sugar. Now what's that all about if Roth withdrawals are supposed to be tax free? Why would basis matter? I suspect the revenue camel is sticking his nose under the tent.
Print the post Back To Top
No. of Recommendations: 2
Now what's that all about if Roth withdrawals are supposed to be tax free? Why would basis matter? I suspect the revenue camel is sticking his nose under the tent.

Nothing nearly so nefarious.

If you make an early withdrawal from a Roth, your basis matters very much. Only your basis can be withdrawn tax free in an early distribution. Earnings included in an early distribution are taxed and penalized. The forms merely need a place to work that basis into the calculations.

--Peter
Print the post Back To Top
No. of Recommendations: 0
I'm a little surprised that some people actually made non-deductible contributions to a traditional IRA. I couldn't find a compelling reason to do so.

It made sense during the Reagan years for a short period when dividends and capital gains were taxed the same as W-2 income.

It's been a while, but I don't think I found "taxed the same" compelling. I'd like to think my analysis actually concluded that it was better to keep tax-deferred and non tax-deferred savings in separate accounts. (No Form 8606, for instance.)

Ratio ~
Print the post Back To Top
No. of Recommendations: 2
RatioFool,

I'd like to think my analysis actually concluded that it was better to keep tax-deferred and non tax-deferred savings in separate accounts. (No Form 8606, for instance.)

Not sure what you mean here.

Tax-deferred will be in the trad IRA. Non tax-deferred will be in a taxable account.

If you are speaking only of contributions, taking the deduction or not, you need to understand all traditional accounts for an individual are treated as a whole for calculations on the 8606. Splitting pre-tax and post-tax contributions between two separate traditional IRAs does not make a difference.

Gene
Print the post Back To Top
No. of Recommendations: 0
I'd like to think my analysis actually concluded that it was better to keep tax-deferred and non tax-deferred savings in separate accounts. (No Form 8606, for instance.)

Not sure what you mean here.

Tax-deferred will be in the trad IRA. Non tax-deferred will be in a taxable account.

If you are speaking only of contributions, taking the deduction or not, you need to understand all traditional accounts for an individual are treated as a whole for calculations on the 8606. Splitting pre-tax and post-tax contributions between two separate traditional IRAs does not make a difference.


Yes, I know. To clarify, no post-tax contributions were made to my traditional IRA. For my 401k, I only contributed enough to get the full employer match.

Ratio ~
Print the post Back To Top
No. of Recommendations: 0
billiam

After tax contributions to one's TIRA made perfect sense in the years before the Roth (1998 I believe), when one's AGI was too high to the contribution to be deductible. Wife and I did this for many years, as typically I hold the tax inefficient securities (bonds, REITs, utilities) in our tax deferred accounts and growth-oriented securities in taxable accounts.

Yes, TIRA withdrawals are proportioned between pre and post taxed account value(s). I too would probably be complaining, were it not for TurboTax.

And I have talked to many over the years who have made after tax contributions to their TIRA and have no idea what a form 8606 is. So unless they figure it out or have their tax preparer figure it out, its doubletaxationville when they make their withdrawals.

And to complicate this just a wee bit more....if one works for an employer whose 401(k) plan allows after tax contributions, when they do their TIRA rollover, an 8606 is not issued, thus the 'basis' must be tracked separate from any existing 8606 and then must be reported on a form 8606 in the year of a TIRA withdrawal or Roth conversion.

BruceM
Print the post Back To Top
No. of Recommendations: 0
Good info/warning.

Good reason to try to keep accounts separate.

I made the mistake many years ago of moving a rollover IRA from one account to another company*. This is preventing me from rolling it back into my current 401k plan so I can cleanly backdoor a Roth IRA.

*I don't have this paperwork. I have the rollover paperwork into the original account, but no proof of the account transfer. My company accepts the rollover funds, but I need to have a clean paperwork trail. I'm still working on this.

--
whyohwhyoh
Print the post Back To Top