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traditional IRA

Q&A: Sorting out IRA taxes

October 24, 2022 By Liz Weston

Dear Liz: My traditional IRA contains both pre-tax and after-tax contributions. (Some years I was ineligible to deduct contributions because I was participating in an employer’s retirement program.) Now I am retired and am considering making Roth conversions from the traditional account. I admit I was a little careless about keeping track of the total after-tax contributions. For the past 10 years or so, I have been using one of the more popular tax programs and was letting it track the tax basis and file the Forms 8606. I recently reconstructed all of my IRA contributions since 1985 to check the basis and discovered that the amount the software had calculated was short by about $15,000. Is it possible to correct this so that I don’t end up paying tax on the wrong basis?

Answer: Yes, but this could be a difficult process, according to Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

As you know, when making Roth conversions you’re required to pay income taxes on the portion of your IRA that represents deductible contributions plus any earnings. But you don’t have to pay taxes on the portion of your account that represents your nondeductible contributions — that is what is known as your tax basis. A higher basis means less taxes, so correcting this may be worth the effort.

You’ll have to go back and correct each Form 8606, working from the oldest year, Luscombe says. The corrections need to reflect the traditional IRA contributions for that year, including the dollar amount, any deduction taken and the return of any excess contribution.

Send the corrected 8606s to the same service center where you will send the tax return for the conversion. If you’ve taken any distributions from the account, your calculations for the taxable portion may be in error as well. You can correct that for the past three tax years, but you won’t be able to recover the excess tax paid in any previous years, Luscombe says.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.

Filed Under: Q&A, Taxes Tagged With: traditional IRA

Tax bills for inherited IRAs

August 19, 2013 By Liz Weston

Dear Liz: I am 64. My grown children, ages 23 and 25, are the beneficiaries of my retirement accounts. I have a Roth IRA, a SIMPLE IRA and a Rollover IRA. When I die, what will be the tax consequences for them? Will they have to pay any tax upon inheriting the accounts, and will they have to pay any tax when they withdraw the money over time?

Answer: If your estate is worth less than $5 million, it’s unlikely it will incur federal estate taxes. Some states have lower exemption limits and a few have inheritance taxes. New Jersey and Delaware have both. An online search for “state estate and inheritance taxes” should turn up the situation for your state.

Your children won’t have to pay income taxes on distributions from your Roth, but unlike you or a spouse they are required to take distributions once they inherit the account. They can either do so within five years of your death or they can opt to spread the distributions over their lifetimes (which is usually the better option).

Minimum distributions also will be required from your IRAs. Your heirs will have to pay income taxes on those distributions.

Advise your children to consult a tax pro after you die, since these accounts need to be properly handled and titled to get the most benefit.

Filed Under: Estate planning, Q&A, Retirement, Taxes Tagged With: estate tax, Individual Retirement Account, inherited IRA, inherited Roth, IRA, Roth, Roth IRA, roth vs. IRA, traditional IRA

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