IRA Contribution Deductions, After-Tax IRA Contributions Highlight Mailbag

This week's Slott Report Mailbag includes questions about deductions of IRA contributions and how to handle after-tax IRA contributions. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find out at this link.

1.

My wife took a job in October 2010 and qualified for a 401(k) and put $2,000 into that 401(k) in 2010. She also set up an IRA and contributed $6,000 based on age and catch-up rules over 60. The adjusted income was $137,000 for 2010. Can she deduct the full $6,000 or must she offset it by the $2,000 that went into IRA?

Thanks,

PH

Answer:
The $1,000 catch-up rule applies to age 50. So long as you reach age 50 or older by 12/31 of the year on the contribution you can add the $1,000. You must have earned income equal or greater than your contribution.

There are phase-out ranges for IRA contributions. If you are filing a joint income tax return the contributions begin to phase-out at $90,000 and completely phase out at $110,000. If your joint income falls below $110,000 the contribution is deductible. For all the rules regarding deductibility of IRA contributions, see IRS Publication 590. You can find it on the IRS website, www.irs.gov. On the left hand side of the screen, click on Forms and Publications.

2.

I have made after-tax IRA contributions and kept a record. In 2010, I converted to a Roth IRA, so how do we take into account the part that was after-tax contributions?


Answer:
When an IRA contains both nondeductible and deductible funds then each dollar withdrawn from the IRA contains a percentage of tax free and taxable funds based on the percentage of after-tax funds to the entire balance in all of your IRAs. You cannot just withdraw or convert the nondeductible funds and pay no income tax. You keep track of all of your after-tax contributions on Form 8606, which is required to be filed with your tax return each year you have made an after-tax contribution. You will use the same form to report your Roth conversion and to calculate the taxable amount of the conversion. The instructions for the form give you some guidelines on how to substantiate your after-tax contributions if you have not previously filed the form.

By Marvin Rotenberg and Jared Trexler
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