Poor Record Keeping and the Taxable Portion of IRA;s | Ed Slott and Company, LLC

Poor Record Keeping and the Taxable Portion of IRA;s

Some folks did not do a good job of keeping track of their after tax IRA contributions. So, determining the taxable (or non-taxable) portion of the IRA when taking a RMD can be difficult--almost guesswork. Are their any statistics that might assist these folks to determine a "reasonable" taxable portion of these IRA's?

  • People with high valued IRAs often have only 1-3% basis in their IRAs because they only made non deductible contributions for a few years, often when the deduction limit was half what it is now.  There really isn't a formula for making a reasonable guess, and even if there was the person would need to file an 8606 for specific years. You can't just start showing basis with no prior 8606 forms filed. 
  • There are several possible situations that result in this problem. If someone filed the 8606 forms in the past, but has since tossed more recent tax returns, the IRS can usually supply a tax return transcript for the last 10 years or so. It would include any 8606 filed. Once you have the last 8606 filed, line 14 of that form shows your current basis if you have not taken any distributions since. In other cases, the taxpayer may be able to substantiate basis for certain years only and could then file an 8606 if needed for those years and in effect only claim the basis they can document. For a given year, what is needed to file an 8606 is evidence that you made a TIRA contribution, and did not deduct it, recharacterize it, or withdraw it as an excess contribution. In many cases this can result in a daunting research project.

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