Reminders on the Importance of Tracking IRA Basis

When clients make after-tax contributions to IRAs, these nondeductible contributions form the "basis" in the client's IRA, and are withdrawn tax-free (unlike traditional, deductible contributions, which are taxed under the general rules upon distribution). After-tax funds that are rolled over from another retirement account will also be added to the account's basis. Clients keep track of IRA basis on Form 8606, which must be filed with the IRS if the client made any nondeductible contributions to an IRA for the year, or if they received a distribution from an account that has a basis that is greater than zero. The form is also required if the client made a Roth IRA conversion. Form 8606 must be filed if the client receives a distribution or transfers funds from an inherited IRA that has basis. A $50 penalty applies for failure to file an annual Form 8606 when one is required, and a $100 penalty applies to clients who overstate IRA basis—but the primary penalty for failure to properly track basis is the possibility of double taxation. For more information on nondeductible IRA contributions, visit Tax Facts Online. Read More: Link to Q3671.