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Background:

I recently realized that I need to file IRS form 8606 for a previous tax year(2011), to track my basis for non-deductible contributions to a traditional IRA.

I hold a bond fund in the traditional IRA account, which pays monthly interest. In the year for which I am filing form 8606, I made monthly investments in the bond fund. I also set the account to re-invest any interest that the bond fund produced in the same fund. In the transaction history of the fund, the custodian has marked these 2 methods as "Buys" and "Distributions". But looking only from a account point of view, both have bought additional shares in the fund.

Questions:

  1. For the line in the form, where it asks for total contributions, I am confused by what means. Should I only include the "Buys" that I did with my post-tax income or should I also include the "Distributions" which also bought the shares of the bond fund?
  2. The "Buy" transactions were made for the fund in 2011 tax year. After that year, there were no "Buy" transactions but only "Distributions". In that case, do I also need to file 8606 for 2012 tax year?
  • Unless you have large amounts of deductible Traditional IRA, I recommend that you convert your Traditional IRAs to Roth IRA as soon as possible. There is no point in keeping a non-deductible Traditional IRA for a long time. It is strictly worse than a Roth IRA. – user102008 Apr 22 '13 at 0:38
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You report what you contributed (sum of monthly investments that you made) to the bond fund. Distributions are the earnings in the account that stay in the account and have no tax consequences (in particular, you don't report them as income on your tax returns) until you withdraw the money later.

  • You report what you contributed and haven't deducted on your 1040 – littleadv Apr 22 '13 at 0:29
  • @littleadv Yes. I assumed that the OP had not deducted any contributions to the Traditional IRA on Form 1040 for Year 2011, and was filing Form 8606 to report nondeductible contributions only, since the question said "....track my basis for non-deductible contributions to a traditional IRA....." – Dilip Sarwate Apr 22 '13 at 2:42
  • not arguing, emphasizing. You'd be amazed how many people don't really understand the words they're using. – littleadv Apr 22 '13 at 12:57
  • @littleadv Oh, I agree whole-heartedly, though I am no longer amazed at how little so many people understand the words they are using, especially terms involving money. – Dilip Sarwate Apr 22 '13 at 14:26
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  1. Only your contributions count. There should be no ambiguity in what you contributed to the IRA. The IRA should have sent you a Form 5498 at the beginning of the next year detailing what you contributed that year. This is important because there are limits on how much you can contribute to an IRA per year.

  2. You don't need to fill out the form in a following year if you've made no nondeductible contributions (or Roth IRA conversions or any of the other stuff on the form) that year.

  • Generally, Form 5498 for Year X is received too late to help in filing Form 1040 and Form 8606 for Year X in timely fashion by April 15, X+1. – Dilip Sarwate Apr 22 '13 at 2:44
  • @Dilip is right, 5498s are usually sent out in May (they wait for the late contributions until April 15th). Also, I think that filing 8606 while not required - is useful even for years when you didn't have non-deductible contributions, as long as you have a basis in your IRA. Its a paper trail for the IRS, and a reminder for you. – littleadv Apr 22 '13 at 12:59

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