Dear Tax Talk,
I started an IRA at age 26. The first two years, I got a small deduction on my income taxes. After that, my income was too high to get a deduction, but I still continued to contribute the maximum amount that I could.

I am now 65. If I did not get a tax break, why do I have to pay tax on my withdrawals?
— Glen

Dear Glen,
You need to use IRS Form 8606, Nondeductible IRAs, to help you calculate the nontaxable portion of your withdrawal. This form is used to track all of your nondeductible IRA contributions over the years.

However, as you know, the amount of your IRA contribution that is deductible each year depends on three factors:

  • Are you or your spouse covered by a pension plan at your place of employment?
  • What is your filing status?
  • What is your modified adjusted gross income?

The instructions for Form 8606 help you calculate the amount of nondeductible contributions you have made each year and then track it going forward to future years.

Based on your letter, it appears you may not have been filing Form 8606, which is first required in the year that you made a nondeductible IRA contribution and then required in future years to keep track of your total nondeductible contributions. The form is two pages long and the instructions are 12 pages long, so be prepared to be confused.

For future reference, be sure to note on the instructions for Form 8606 under “What Records Must I Keep” that among other items, you are required to keep a copy of Page 1 of Form 1040 for each year you made a nondeductible contribution to a traditional IRA; Form 8606 and any supporting statements and work sheets for all applicable years, and IRS Form 5498 if it was required. The form and instructions are available on the IRS website.

At this point, you may wish to consult with a tax professional to assist you in your calculations. I hope you have kept track of your IRA over the years.

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

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