What is IRA Basis?
IRA basis is the sum of after tax contributions made to your Individual Retirement Account. This can include traditional IRAs, rollover IRAs, inherited IRAs, and Roth IRAs. Many taxpayers fail to keep track of after tax contributions to these retirement accounts. This is not a good idea because you end up paying tax twice on the money you contribute to your IRA; once on the way in and once on the way out.
In one example, you receive wages from your employer and you make a non-deductible traditional IRA contribution. This money was already subject to income tax, social security tax, medicare tax, and state tax. Let’s imagine this comes to a marginal rate of 37%. Some years later, you take the money out (before age 59-½). Now you will pay income tax, state tax, and a 10% penalty. Furthermore, let’s imagine this comes to a marginal rate of 43%: 37% plus 43% is 80%. Is it worth it? We think not.
Why would someone have non-deductible IRA contributions?
There are several reasons one might have non-deductible IRA contributions that factor into IRA basis.
- Your income might be too high to have deductible IRA contributions. You inherited an Individual Retirement Account with cost basis.
- You made after tax contributions to a 401k that was later rolled into an Indiviual Retirement Account. Roth IRA contributions are never deductible.
- In certain situations you can also elect to have your traditional IRA contributions be treated as non-deductible.
Your cost basis for these contributions is recorded on Form 8606 in the year the contributions were made. However, the form is not filed in the years there were no contributions. This creates a lack of continuity for many taxpayers and often leads to people losing track of their IRA basis. This means they will end up with a double taxation of 80% like we mentioned above.
How do I figure out what the cost basis is for my Individual Retirement Account?
Regardless if you have a Roth IRA basis, traditional Investment Retirement Account basis or need to determine after death basis, Worthtax can help. If you have an IRA and need to track down its cost basis or if you need assistance in computing the tax liability on a distribution, please feel free to contact Alex Franch, BS EA at 781.849.7200 or email us at firstname.lastname@example.org.
IRA Tax Basis Sources and Resources
- 3 Reasons to Avoid the 401k Tax Spiral
- Alimony Tax Issues
- Are Social Security Benefits Taxable?
- 60-Day Rollover
- Only One IRA Rollover Every 12 Months – Period!
- Charitable Contribution: Tax Plan for Potential IRA-to-Charity Provision
- Turning 70 1/2 this year? You may face a number of special tax issues.
- Spousal IRA: Do Not Overlook
- Retirement Savings: the Earlier, the Better