How to Track Non-Deductible IRA Contributions

Individual Retirement Accounts (IRAs) have long been a popular way for individuals to save for retirement while benefiting from tax advantages. There are several types of IRAs, but for this article, we'll focus on non-deductible IRAs. While the concept of non-deductible IRAs might sound complex, understanding how to track these contributions is essential for maintaining accurate tax records and avoiding unnecessary complications when filing your taxes. This article will explain what a non-deductible IRA is, why it's important to track contributions, and the best methods for doing so.

What Is a Non-Deductible IRA?

A non-deductible IRA refers to a traditional IRA where the contributions made to the account are not deductible from your taxable income. This type of IRA is often used by individuals who have income that exceeds the limits for contributing to a deductible IRA. Though you don't get the upfront tax deduction, the money in the account still grows tax-deferred until withdrawal, and withdrawals made after the age of 59 ½ are taxed at ordinary income tax rates.

For example, if you are contributing to an IRA and your income exceeds the allowable limits for tax-deductible contributions, you may still be eligible to contribute to a non-deductible IRA. While you won't receive a tax break for the contribution year, the funds will grow tax-deferred, and you will only be taxed on the earnings when you withdraw them.

Key Features of Non-Deductible IRAs

• No Immediate Tax Deduction: You won't reduce your taxable income for the year you make the contribution, which is why it's called a non-deductible IRA.
• Tax-Deferred Growth: Although you don't get an upfront tax break, the funds in the account will grow without being taxed annually. Taxes are deferred until you begin withdrawing funds in retirement.
• Post-Retirement Taxation: When you take distributions from the non-deductible IRA, you'll be taxed on the earnings and not the principal, as the principal was already taxed at the time of contribution.

Why is It Important to Track Non-Deductible IRA Contributions?

Properly tracking your non-deductible IRA contributions is crucial for two main reasons:

1. Avoid Double Taxation: Since you don't get a tax deduction for non-deductible IRA contributions, it's important to track them to ensure that you don't end up paying taxes on those contributions again when you withdraw them. The IRS requires that you report the contributions so that only the earnings, not the original contributions, are taxed upon withdrawal.

2. Correct Filing of IRS Forms: When you contribute to a non-deductible IRA, you'll need to report the contributions to the IRS on Form 8606. If you don't properly track and report the non-deductible contributions, the IRS will assume that you're deducting the entire amount, and you may be taxed on the contributions again.

Failing to track and report non-deductible IRA contributions properly can lead to overpaying taxes when you begin taking withdrawals, or worse, IRS penalties.

How to Track Non-Deductible IRA Contributions

1. Keep a Detailed Record of Contributions

The first step to tracking your non-deductible IRA contributions is to keep detailed records of every deposit made into the account. While your IRA custodian will typically provide you with account statements showing the amount of each contribution, you must also make your own records. This ensures that you have an accurate log for when it's time to file your taxes.

Here are the key details to record:

• Contribution Date: When you make a contribution, record the exact date. IRA contributions are typically due by the tax filing deadline (including extensions), so it's important to track this to ensure your contributions are in the right tax year.
• Contribution Amount: Make a note of the exact amount you contribute each year. If you contribute multiple times during the year, track each individual deposit.
• Tax Year for Contribution: While contributions for a given year are usually made by April 15th of the following year, they should be reported in the tax year they are meant to apply to. For instance, a contribution made in January 2025 could apply to your 2024 IRA contribution limit.

Use a spreadsheet, a financial software program, or even a manual logbook to maintain this record.

2. File Form 8606 with Your Tax Return

Form 8606, "Nondeductible IRAs," is the IRS form used to report non-deductible IRA contributions. This form is essential for tracking your contributions and ensuring you aren't taxed twice on the same money. It needs to be filed every year you make a non-deductible contribution, even if you don't make any withdrawals that year.

Here's how to fill out Form 8606:

• Part I: Report your non-deductible IRA contributions. This section is where you'll list your non-deductible IRA contributions for the year, including the amount and the tax year to which they apply.
• Part II: Report any distributions you take from the IRA in the year. If you make any withdrawals, you'll need to report how much of the distribution is taxable and how much is considered a return of your non-deductible contributions.

Even if you don't make any withdrawals, you still need to file Form 8606 to report contributions. If you don't file it, the IRS will assume that all distributions are taxable, which could lead to paying taxes on your non-deductible contributions again.

3. Track the Basis of Your IRA

The term "basis" refers to the total amount of non-deductible contributions you have made to your traditional IRA. It's important to track this basis from year to year so that you can calculate how much of your distributions are taxable.

The basis includes only non-deductible contributions and is adjusted over time. Here's how to track it:

• Starting Basis: Your basis starts with the first year you make a non-deductible contribution. For example, if you contribute $5,000 in year one, your basis is $5,000.
• Adjusting Basis: As you make additional non-deductible contributions, you need to add them to the basis. If you contribute another $5,000 the next year, your total basis is $10,000.
• Distributions and Basis: When you take distributions from your non-deductible IRA, part of it is a return of the basis (non-taxable), and part is taxable (the earnings). It's important to track how much of the basis has been used up with withdrawals. The more distributions you take, the lower your basis will become.

You can calculate your IRA basis on Form 8606, which will carry forward the amount of your non-deductible contributions from previous years.

4. Monitor Your Total IRA Contributions

It's also essential to keep track of your total IRA contributions each year, not just the non-deductible portion. The IRS sets annual contribution limits for IRAs, and you can't exceed these limits across all your IRAs (including traditional IRAs, Roth IRAs, and SEP IRAs). For 2025, the contribution limit is $6,500 ($7,500 if you're 50 or older).

Here's why this matters:

• Over-Contribution Penalties: If you contribute more than the annual limit, you'll face penalties, even if part of the contribution is non-deductible.
• Contribution Type: If you contribute both deductible and non-deductible amounts to your traditional IRA, you'll need to track the different types to calculate the taxable portion of your IRA distributions accurately.

Regularly monitoring your total contributions will help you avoid exceeding these limits and ensure that your non-deductible IRA is being tracked correctly.

5. Use Financial Software or IRA Custodian Tools

Many financial tools and IRA custodians offer services that help you track your contributions and calculate the taxable and non-taxable portions of your distributions. Some software programs allow you to input your contributions each year, and they automatically calculate your basis, generate the necessary tax forms, and provide reminders for the tax year.

Common financial software includes programs like TurboTax, H&R Block, or specialized tools like Mint and Personal Capital. These platforms make it easier to track your non-deductible IRA contributions over time and reduce the risk of errors.

IRA custodians such as Fidelity, Charles Schwab, or Vanguard also provide helpful tools that allow you to track contributions and distributions directly within their platforms. Most custodians will report the non-deductible contributions on Form 1099-R, which can be used to help you prepare Form 8606.

Conclusion

Tracking non-deductible IRA contributions may seem like a small detail, but it is crucial for maintaining proper tax records and ensuring that you don't pay taxes twice on the same contributions. By keeping accurate records, filing Form 8606, and monitoring your IRA basis, you can avoid unnecessary complications when it comes time to withdraw funds in retirement. Whether you're using a spreadsheet, financial software, or relying on your IRA custodian's tools, staying organized and on top of your non-deductible IRA contributions will help you maximize the benefits of your retirement savings strategy.

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