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Separate IRA for Nondeductible Contributions

Last Updated April 23, 2013

Question: 

I am ineligible to deduct my traditional IRA contribution, and decided to make a nondeductible contribution.  I understand that I need to keep track of the nondeductible contribution, so as to prevent the amount from being taxed when distributed.  Should I establish a separate traditional IRA for this?

Answer: 

It is not necessary to establish a separate IRA for nondeductible contributions, as all your traditional, SEP and SIMPLE IRAs are treated as one IRA for purpose of determining the taxable amount of any distribution from either of those IRAs. For instance, assume you have three IRAs, one with $2,000 nondeductible contribution, another with $4,000 deductible contributions, and the third with $4,000 SEP IRA contribution. If you take a distribution of $2,000, the distribution will be prorated to include 1/5 nontaxable amount and 4/5 taxable amount, regardless of which of the traditional, SEP or SIMPLE IRA the distribution is taken from.

You must file IRS Form 8606 to keep track of the nontaxable (nondeductible) amounts. Form 8606 must also be filed for any year that you take a distribution from any of your traditional, SEP or SIMPLE IRA, so as to determine the taxable and nontaxable portion of the distribution.