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Nondeductible IRA

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    Nondeductible IRA

    I am processing an amended return for a new client. The client received a Amended K-1 from her father's estate. The amended K-1 increased her interest, dividend and trust income. Her husband works and contributes to a 401(k). Both taxpayers are over 50.

    My problem is this:

    On the original return they had a $5,900 deduction for IRAs; $2,400 him, $3,500 her. Because of the increase in their income, $1,600 of his IRA is now nondeductible.

    1) Will the 6% excise tax apply in 2005 if he does not convert it to a Roth IRA or withdraw it?

    2) Should I tell them to leave it in the IRA and take it against 2005 contribution?

    As always, thank you for your help.


    not an excess contribution

    If there was enough income for the contribution in the first place, then it is not an excess contribution and would not be subject to the 6% penalty.

    He can call it a non-deductible contribution, fill out an 8606 to keep track of his non-deductible basis in the IRA (will mean less is taxed on withdrawal) or, if he wants a deductible, he could change it to a 2005 contribution. A ROTH is also a possiblility for a non-deductilbe contribution with different withdrawal rules.

    If the return was filed with a full deduction, then that would need to be amended.

    I often find that the best advise for options comes from the IRA provider in terms of what flexibility remains in moving or reclassifying a contribution. They can be a good resource in addition to the tax advise we can give in these matters.