Check Your IRA Basis

Do you have basis in your traditional IRA? If you’re not sure, taking the time to review prior-year tax returns could save tax dollars in the future. That’s because basis in an IRA reduces the taxable portion of your distributions. 

Here’s how it works. You accumulate basis in a traditional IRA by making nondeductible contributions, or by rolling after-tax contributions from other qualified plans into your account. In either case, you receive no current tax benefit from the contribution.

The benefit comes later, when you begin to take withdrawals. Generally, distributions from your traditional IRA are taxable. However, when you have basis, part of each distribution is considered a return of your investment. That part is not taxable.

One thing to be aware of: You cannot withdraw only basis. Instead, you allocate a portion to distributions using a ratio based on the combined year-end balance of all your traditional IRAs.

How do you know what your basis is? “Form 8606, Nondeductible IRAs,” is one place to start. This form should be filed with your federal income tax return each time you make nondeductible contributions or take distributions from an account with basis.

If you neglected to file Form 8606 in past years, or you inherited an IRA that may include basis, we can help you recreate the information you need. Please call for details.