Fixing a Common Problem with Non-Deductible IRAs

John Robinson |


By J.R. Robinson

Since 1987, individual investors who were not eligible to make deductible traditional IRA contributions have still been permitted to make non-deductible contributions. The original allure of this opportunity is/was that it gives people an additional avenue to save for retirement on a tax-deferred basis. While the popularity of non-deductible IRA contributions waned with the advent of Roth IRAs, it was commonly employed by consumers from the late 1980s through the 1990s, and is still used sporadically today by investors whose incomes preclude Roth eligibility.

Per IRS rules, retirement distributions from non-deductible IRAs are taxed on a pro-rata basis with the percentage of the distribution that may be attributable to the IRA holders after-tax contributions being excluded from taxation. However, as described in an article I penned for NerdWallet last year entitled, Non-Deductible IRA Contributions Could Leave You Taxed Twice, many investors who made non-deductible IRA contributions were unaware that they are responsible for reporting them on IRS Form 8606 . This form both documents the current year’s non-deductible IRA contribution and records the cumulative total of all such prior contributions. Fortunately, as outlined in the following articles, for many consumers it may be possible to correct this oversight –

Forgot to File Form 8606 for Non-Deductible IRAs (

Late Form 8606 filings (Ed Slott and Company) 

Sidestep Tax Hit by Reconstructing IRA Basis (On Wall Street)

Preparing late Form 8606 filings may require a bit of forensic bookkeeping, and readers are encouraged to enlist the expertise and assistance of a CPA, but the exercise may very well be worth the effort. In addition to avoiding double taxation, for some investors, careful planning may enable free Roth conversions of the non-deductible contribution amount.

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Securities offered through J.W. Cole Financial, Inc. (JWC) member FINRA/SIPC. Advisory services offered through Financial Planning Hawaii and J.W. Cole Advisors, Inc. (JWCA). Financial Planning Hawaii and JWC/JWCA are unaffiliated entities.