You made after tax-contributions to your IRA. How does IRS know that you have after-tax money in your IRA?
You must file IRS Form 8606 with your tax return. This form will track your after-tax IRA contributions. Each year you bring the prior year-end balance forward and add any new after-tax contributions to the total.
Once you have after-tax amounts in your IRA you generally cannot take a distribution of just the after-tax amounts from your IRA. You must pro rate all distributions. This formula is also on Form 8606. For this rule, all IRAs are considered one IRA (including SEP and SIMPLE IRAs) and all distributions are treated as one distribution. You take the balance of all your after-tax contributions and divide it by the total of all the balances in all your IRAs. The percentage you get is the percent of your distributions for the year that are income tax free. You then subtract the after-tax amount distributed for the year from your total after-tax balance to come up with your new beginning balance for the next year.
Make sure you file this form with your return. Otherwise, you may end up paying income tax again on your after-tax contributions.
-By Beverly DeVeny and Jared Trexler
Smart money/Coming Soon
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Consumers: Send in Your Questions to [email protected]
Q:
Can I transfer money from my IRA to my husband's Roth IRA? I am 35, and he is 36.
Thank you!
Gail Clements
A:
No. The only way your IRA funds can be transferred to your husband’s IRA is in a divorce or after your death. Even then, it would have to be transferred to a similar IRA, for example an IRA to IRA or a Roth IRA to another Roth IRA. In this case, you cannot transfer your IRA into your husband’s Roth IRA.
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