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February 28, 2009

Is a separate IRA Needed for noneductible Contributions?

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Is a separate IRA Needed for noneductible Contributions?

An individual is ineligible to deduct his traditional IRA contribution, and has decided to make a nondeductible contribution. I understand that he needs to keep track of his nondeductible contribution, so as to prevent the amount from being taxed when distributed. Should he establish a separate traditional IRA for this?

It is not necessary to establish a separate IRA for nondeductible contributions, as all of the individual’s traditional, SEP and SIMPLE IRAs are treated as one IRA for purpose of determining the taxable amount of any distribution from either of those IRAs. For instance, assume he has three IRAs, one with $2,000 nondeductible contribution, another with $4,000 deductible contributions, and the third with $4,000 SEP IRA contribution. If he takes a distribution of $2,000, the distribution will be prorated to include 1/5 nontaxable amount and 4/5 taxable amount, regardless of which of the traditional, SEP or SIMPLE IRA the distribution is taken from.

The individual must file IRS Form 8606 to keep track of the nontaxable (nondeductible) amounts. Form 8606 must also be filed for any year that the IRA owner takes a distribution from any of his traditional, SEP or SIMPLE IRA, so as to determine the taxable and nontaxable portion of the distribution.

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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