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January 28, 2014

Is it easier to keep Nondeductible IRA contributions separately?

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Is it easier to keep Nondeductible IRA contributions separately?

In your QandA | Separate IRA for Nondeductible IRA Contributions, you explained that it is not necessary to establish separate IRAs for “nondeductible IRA contributions”. I have the following follow-up question:“While it is not necessary to maintain a separate IRA for nondeductible contributions, would it be easier to keep those contributions in a separate IRA for tracking purposes?”

In my opinion- no. However, it comes down to the IRA owner’s preference! The following are some factors that should be considered by someone who is considering such an option:

  • You would still be required to file Form 8606. You could be subject to IRS assessed penalties if you fail to file IRS Form 8606.
  • Generally, keeping these contributions separate provide no benefits to you- as an IRA owner-that are not already available with the filing of Form 8606. Consider this- if you keep those nondeductible contributions in a separate IRA and you want to determine your total nondeductible IRA contributions, you could:
    • Check your Forms 5498 and tax return for every year the IRA is opened, to determine the amount of nondeductible contributions, and tally the amounts. This would ensure that losses/earnings are not included in your total.
    • Or, you could simply check your most recent Form 8606- assuming that you do file one for every year it is required to be filed. You would still need to check your Form 8606 anyway- as it is the official document for identifying your nondeductible contributions.
  • Your IRA Custodian is not responsible for keeping track of your nondeductible IRA contributions. You would be responsible for keeping track of which of your IRAs hold those nondeductible contributions. Form 8606 serves this purpose
  • Keeping these contributions in separate IRAs could mean paying fees for multiple IRAs. This includes maintenance fees, administrative fees, and ticket charges for trades -for instance, if you want to buy 100 shares of a stock, and split that trade between the two IRAs.
  • Keeping these contributions separate IRAs may mean more statements to retain/manage
  • Unless there is some identifying marker/record on the account ( or your account records) that interested parties (you, your beneficiaries, your tax/estate planning professional) can use to identify the IRA as one that holds nondeductible contributions, keeping the contributions separate might not be helpful. Generally, IRA custodians/Trustees do not add such identifying markers/labels.

Response by Denise Appleby CISP, CRC, CRPS, CRSP, APA

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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