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February 18, 2009

Basis

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Definition

Amounts representing nontaxable portion of a balance in a retirement account. Also referred to as after-tax amounts

Basis comes from the sources which includes the following:

  • Nondeductible contributions to traditional IRAs
  • Roth IRA contributions
  • After-tax contributions to qualified plans and 403(b) arrangements
  • Contributions to HSAs
  • Contributions to ESAs
  • If the participant or beneficiary repays a loan after a deemed distribution of the loan under section 72(p), then, for purposes of section 72(e), the participant’s or beneficiary’s investment in the contract (tax basis) under the plan increases by the amount of the cash repayments that the participant or beneficiary makes on the loan after the deemed distribution. However, loan repayments are not treated as after-tax contributions for other purposes, including sections 401(m) and 415(c)(2)(B).

Basis amounts are tax-free when distributed from the retirement account.

Failure to keep track of basis will result in the amount being taxed when distributed ( instead of the amount being tax free.

See “Additional Helpful Information” below for information about how basis is recovered

Referring Cite

IRS Notice 89-25, IRS Form 8606 and its instructions , IRS Publication 590, IRS Publication 575 , Treas. Reg. 1.72(p).

Additional Helpful Information

  • Individuals who make nondeductible contributions or rollover after-tax contributions to traditional IRAs must file IRS Form 8606, to report the after-tax credit to the IRS, and to keep track of the basis.
  • Form 8606 should also be filed for any year that an individual takes a distribution ( or make a Roth IRA conversion) from any of his traditional IRA, SEP IRA or SIMPLE IRA, if that individual has basis in any of his traditional or SEP IRAs
  • The Job Creation and Worker Assistance Act of 2002 (JCWAA) – which amended EGTRRA, provides that if a distribution from a qualified plan includes both after-tax (basis) and pre-tax amounts, any amount that is rolled over is deemed to include pre-tax amounts first. For instance, assume an individual receives a distribution of $50,000. $10,000 of this amount is after-tax assets. The individual rolls over $40,000. The $40,000 will be the pre-tax amount.  If the individual rolls over $5,000, the $5,000 will be from the pre-tax amount.
  • Distributions from qualified plans include a pro-rata amount of pre-tax and post-tax assets. An exception applies to amounts accrued before 1987, which allowed the distributions of after-tax amounts to be segregated. Under this exception, an individual could choose to distribute just the after-tax amounts from his qualified plan account. This rule was repealed for years after 1987. It now only apples to grandfathered amounts. Cite IRS Notice 87-13.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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