Don’t forget Form 8606! – MarketWatch

This is the time of year that many people make IRA contributions. When nondeductible contributions are made, they are recorded on Form 8606. These contributions are not taxed when distributed. The featured question this week addresses what to do if you failed to record nondeductible contributions in the past.

Q. Hi Dan,In your response to I.R., you wrote “You should have been tracking and reporting the nondeductible contributions on Form 8606 with your tax returns in past years.” I am 55 years old and probably will retire at 67 or later. I don’t think back in the 1980s and early 90s I always filed Form 8606 when I made deductible IRA contributions. I have wondered about this recently. My IRA’s are still with the same financial institution since I first contributed in 1982. I have time to correct this. What do you suggest I do? Thank you — Mike N.

A. Interesting issue. This is the time of year we account for IRA contributions.

Form 8606 is used to track nondeductible contributions. If you made a deductible contribution during any of those years, it would have been dealt with differently. For instance, on your 2013 return, a deductible contribution would appear on line 32 on the first page of Form 1040.

Failing to record a nondeductible contribution on form 8606 had no effect on the taxes you paid when you omitted the form. Where it hurts you is when distributions come out of your IRAs or you convert to a Roth IRA. Nondeductible contributions are not taxed in the future because they represent already taxed income. Because you omitted nondeductible contributions, the IRS thinks your “basis” is lower than it is and will expect more income to be taxable upon the distribution or conversion.

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You should be able to get the contribution amounts and dates from the financial institution but the institution won’t know if you deducted or didn’t deduct those contributions. For that information, you will need copies of your prior tax returns. If you don’t have them going back as far as you would like, you can get “transcripts” of prior year returns at Note that 1987 was the first year nondeductible contributions were allowed and 2002 was the first year the contribution limit exceeded $2,000 and the “catch up contribution for persons over age 50 came into being.

If you find you didn’t record a nondeductible contribution on one of these past returns, some preparers recommend amending a prior year’s return but others believe filing a corrected 8606 is sufficient. You should consult with your tax preparer on what they believe is best for you.

Q.I am 71 and probably will retire this September. I have an annuity that my wife will start taking monthly withdrawals as part of our monthly income. I have a 401(k) at work and I was thinking of rolling half of it into the annuity to bump up our monthly income a little bit and also have a larger base with which to draw against. I also have a Merrill Lynch account that I inherited from my father. Could I roll the rest of my 401(k) into that account or should I leave it there or do something else with it. Regards — Howard

A. Howard, I can’t tell what kind of annuity you are referring to so I won’t comment on whether it’s a good choice or not but I will share a few things about moving money around.

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The types of accounts involved determine the tax treatment. When funds leave a 401(k), anything that hasn’t been taxed becomes taxable unless those funds are deposited, within 60 days, into another qualified retirement plan in which you participate or a traditional IRA in your name. If it goes in a Roth, you will have converted which is a taxable event. If that annuity doesn’t reside in such a qualified plan or IRA, the untaxed 401(k) funds will be taxable.

Your dad’s old Merrill Lynch account won’t be an account that is eligible to receive a rollover. If you put it in there, it will be taxable even if it is an inherited IRA because non-spousal inherited IRAs can’t accept rollovers.

You could roll it into your own IRA (or Roth IRA and pay taxes) and then buy whatever you want, even an annuity. Also don’t forget that if you retire this year, because you are over 70 ½, that 401(k) money will become subject to Required Minimum Distributions. Amounts attributable to RMD cannot be rolled over or converted to a Roth IRA.

Q. Since half of my wife’s Social Security at 66, $1,156, will be greater than my full expected SS at 66 $1,025 (6 mos after she turns 66), would it not be advantageous to take my reduced distribution of $768 at 62, then, upon my turning 66, relinquish my SS in favor of half of her SS? While we don’t “need” the money, isn’t it better to have more, especially since there seems to be little if no cost to doing so. Does this seem like a logical and a reasonable way to proceed. Thank you for your help. We much appreciate it — Alan

A. One consideration is that benefits received before FRA are subject to reductions if you are still working and earn enough money to be affected ($15,480 for a 62 year old in 2014).

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Beyond that, before your FRA, you don’t get to choose between your retirement and a higher spousal payment. If she hasn’t filed for her retirement benefits, you will just get the $768 at age 62. Once she files (or files and suspends at or after her FRA), you can get additional money as a spouse but it won’t total the full $1,156 because you filed for your retirement before your FRA.

Her filing and suspending allows you to get the spousal addition while she earns delayed credits up to age 70.This is good for couples that believe at least one spouse will live into their 80s and that don’t have a pressing need for the higher earners retirement benefit before the higher earner’s age 70.

Here is another option if delaying her retirement sounds appealing. If you file at 62 and get the $768, when she reaches FRA, if you still don’t need the money, she can file a restricted application and get a spousal benefit of half your $768. Her retirement benefit will earn delayed credits until she switches to her retirement benefit which should be about $3,052 (2X$1,156 plus 32%).

Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you.

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