taxes

Determining nondeductible IRA contributions

Judy O'ConnorDear Tax Talk,
My ex-husband made nondeductible IRA contributions (he's covered by a pension at work; his income is too high to deduct). At the divorce, our accounts were equalized and I received a lump sum into my IRA. Now that it is time to take distributions, I have no way to prove that the initial cost basis consisted of already-taxed dollars. I cannot get through to the IRS about this, and the ex says he has no documents. I do not have the tax returns for all those years to prove it. Am I out of luck?

I would hate to pay taxes on the entire amount of the distribution since I know for sure his IRA was funded with after-tax dollars and not deducted from income for many years.
-- Sandy

Dear Sandy,
You may not be out of luck in proving that some of the IRA assets that you received due to your divorce were made with nondeductible contributions.

When couples divorce, the marital assets they have accumulated have to be determined so that an equitable property settlement can be reached. One item that is addressed is the value of retirement accounts, and if there is a transfer from one spouse to another then it must be made under a "qualified domestic relations order," or QDRO, which is part of the settlement agreement. In your situation, this gave you the right to receive some of the benefits that would have been payable to your husband. Since there was a transfer of some of your ex-husband's IRA to your account and that account included "nondeductible" contributions, then both you and your ex-husband are required to complete IRS Form 8606, Nondeductible IRAs.

Rules for deductible IRA contributions | Money stacks: ©Dmitry Natashin/shutterstock.com, People icons: ©Kuvshinova Nadezhda/shutterstock.com

But you should also note that there is a requirement that Form 8606 be filed with your tax returns for every year when nondeductible contributions are made. In fact, in order to verify the nontaxable part of distributions from your IRAs, you are required to keep, among other information regarding the IRA account, copies of Page 1 of your Form 1040s for the years nondeductible contributions were made and Form 8606 for all applicable years.

Now let's go over this issue of not having the information you need and the ex-husband not cooperating.

  • If the two of you used a professional tax preparer, you can start there and request copies of the returns.
  • If that is not an option, contact the trustee of his IRA and see if you are able to obtain historical information regarding the nondeductible deposits made.
  • The next step would be to complete Form 4506, Request for Copy of Tax Return, for each year that you believe a nondeductible contribution was made. But there is one hitch here: The IRS will go back only six years for you.

If you get overwhelmed, consider seeking the assistance of a qualified tax preparer to help you. Such guidance is invaluable at times like these and will let you move forward in your new life ahead.

Thanks for the great question and all the best to you.

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