Should an individual ever contribute to a nondeductible IRA
? Many commentators believe nondeductible IRAs
are a poor choice because the same funds invested outside the IRA would not generate taxable income until sold, could qualify for favorable capital gains treatment, and if held until death would receive a step-up in basis.
* The conversion is reported on Form 8606, Nondeductible IRAs
(34.) Instructions to Form 8606, Nondeductible IRAs
Nondeductible contributions will not be excluded from gross income as investment in the contract where the taxpayer is unable to document the nontaxable basis through the filing of Form 8606, Nondeductible IRAs
(Contributions, Distributions and Basis) for the year in which such nondeductible contributions were made and the year in which they were distributed.
The practical effect is that a taxpayer must recover any nontaxable amount (basis) ratably as distributions are received, by tracking basis on Form 8606, Nondeductible IRAs
. The tax liability on such a distribution can sometimes lead a taxpayer to improperly conclude his or her best option is to recover the nontaxable portion ratably as distributions are received, without considering a Roth conversion.
. An individual or married couple can also make nondeductible traditional IRA contributions, within limits.5 The limit is the same regardless of income level; it is the excess of the maximum annual contribution amount over the amount deductible.
They would consolidate traditional IRAs, nondeductible IRAs
and Roth IRAs into one streamlined type of account with rules similar to current law Roth IRAs.
However, we can divide these into two main categories, deductible IRAs and nondeductible IRAs
. Of the deductible IRAs, the most common is the Traditional IRA; of the non-deductible IRAs, the most well known if the Roth IRA.
Some vehicles permit investors to make after-tax payments to tax-deferred accounts, such as non-deductible contributions to nondeductible IRAs
and to commercial annuities.
Save for Retirement accounts would replace existing IRAs, Roth IRAs, Nondeductible IRAs
, deferred executive compensation plans, and tax-free "inside buildup" of the cash value of life insurance and annuities.
Roth IRAs are nondeductible IRAs
that permit tax-free and penalty-free withdrawals of contributions and earnings--if the account is held for five years and you are over age 59.5.
RSAs would replace individual retirement accounts including Roth IRAs, and traditional and nondeductible IRAs
. Individuals could contribute $7,500 each year, and the funds would not be taxed if they were withdrawn after the age of 58.