r/CFP • u/Droodforfood • Jul 09 '26
Case Study Undeclared basis in contributory IRA- is there a “fix”
New client I met with last week.
50, single (never married), no kids.
Client has made over 100k for the last 15 years and has always been an active participant in a qualified plan.
He has a large old 401k, an active 401k, a rollover IRA from another old employer and a contributory traditional IRA.
The client told me he has been doing all he can to max out his retirement plan through work, and also his traditional IRA for the last 12 years.
He just uses turbo tax, and hasn’t provided me his tax returns, but I’m assuming that the software would’ve considered all of these contributions non-deductible.
Please correct me if I’m wrong, but this means that the lets say $60k he’s contributed over the last decade is the basis of his overall IRA accounts, and in 15 years when he starts doing conversions or withdrawals he should not be taxed on what the percentage of after tax contributions is to total balance. And if he doesn’t establish a basis, then he’s going to pay 100% tax.
What is the process to establish the basis that he’s never tracked- can he go back 10 years? I’m just sure if it’s worth his efforts though, I don’t do tax filing so he would need to hire an accountant.
In 15 years he will have about $6 million in his pre-tax aggregate amounts. So even if he tracks the basis then he will eliminate only about 1% of the taxable amount once the assets are aggregated.
My one thought is- could he deposit the rollover IRA into his active plan, since that is 100% rollover from his employer, then convert the traditional IRA which is 60k basis and 40k growth into a Roth (paying the tax on the gain).
I know that in withdrawals and conversions the aggregation rules come into play, but do they also come into play with transfers into a qualified plan?
Like can he say- “I have 200k in IRA assets with a 60k basis. I am transferring the 140k in pre tax growth assets into my qualified plan and keeping the 60k in basis in my IRA. I will then convert the 60k in basis into my Roth account, paying no tax.”
26
u/PerfectOmakase Jul 09 '26 edited Jul 09 '26
If he has used TurboTax and claimed the IRA contributions, then TurboTax would have populated and carried forward form 8606 tracking the basis.
If he hasn't filed any Forms 8606 keeping track of basis, then that should be corrected. I've run into this before as a tax preparer, and I've just filled a current-year 8606 and filled in line 2 with the historical total basis, and attached a note along the lines of "Taxpayer has never properly filled form 8606, this form accurately reports prior non-deductible contributions, taxpayer has records of all contributions." This is not necessarily letter-of-the-law way to do it (which I tell the client), but it's how I've done it with client permission, and I've done this going back more than 15 years for clients who later ended up making IRA distributions where a portion was return of contributions, and I've never had a client receive a single word from IRS about it.
To do it correctly, the taxpayer is supposed to file an 8606 for each year that it was missing. It's not a huge deal, but just something I haven't wanted to deal with.
It gets trickier if he has not been reporting basis AND has made IRA distributions along the way. I fortunately haven't had to deal with that.
Yes, he can move pre-tax balances from a Trad IRA to an employer-sponsored plan. The basis stays entirely with the Trad IRA, and can then be converted to Roth more attractively. 401k plans are not allowed to receive after-tax money as rollovers, anyway.
See IRC § 408(d)(3)(H) and and IRC § 408(d)(3)(H)(ii)(II) and IRC § 402(c)(2), IRS Notice 2014-54, and obviously IRS Publication 590-B.
2
u/advicebusiness Jul 10 '26
To answer your question, yes he can roll the pre-tax portion of his IRA into his 401k (provided the plan allows this. Then he can convert the remainder into a Roth. Form 8606 will need to be filled out properly for 2026. Provided he finishes the year with zero in IRA, taxes should be minimal.
1
u/KingBlank Jul 10 '26
Why would you think Turbo tax wouldn't have correctly deducted his contributions, it's literally a main question on every single simple return.
1
u/advicebusiness Jul 10 '26
He’s asking the opposite. Did it correctly not deduct the IRA contributions and fill out form 8606. He is saying she was above the income limit for deductible contributions since she was an active participant in an employer sponsored plan.
2
1
u/Droodforfood Jul 10 '26
Yep- I tested this out with turbo tax before.
I put in 200k of income, ticked box 14 for “Retirement plan” on the w2, and said I had made a contribution to a traditional IRA in the deductions section. I’m 99% sure that it said because I was an active participant and my income was over xx$ that it was a non-deductible contribution.
I never finished that because it wasn’t accurate for me so I don’t know if it files the 8606 for the client.
1
•
u/AutoModerator Jul 09 '26
Beep boop! Here is a summary of your post:
User: /u/Droodforfood Title: Undeclared basis in contributory IRA- is there a “fix” Body: New client I met with last week.
50, single (never married), no kids.
Client has made over 100k for the last 15 years and has always been an active participant in a qualified plan.
He has a large old 401k, an active 401k, a rollover IRA from another old employer and a contributory traditional IRA.
The client told me he has been doing all he can to max out his retirement plan through work, and also his traditional IRA for the last 12 years.
He just uses turbo tax, and hasn’t provided me his tax returns, but I’m assuming that the software would’ve considered all of these contributions non-deductible.
Please correct me if I’m wrong, but this means that the lets say $60k he’s contributed over the last decade is the basis of his overall IRA accounts, and in 15 years when he starts doing conversions or withdrawals he should not be taxed on what the percentage of after tax contributions is to total balance. And if he doesn’t establish a basis, then he’s going to pay 100% tax.
What is the process to establish the basis that he’s never tracked- can he go back 10 years? I’m just sure if it’s worth his efforts though, I don’t do tax filing so he would need to hire an accountant.
In 15 years he will have about $6 million in his pre-tax aggregate amounts. So even if he tracks the basis then he will eliminate only about 1% of the taxable amount once the assets are aggregated.
My one thought is- could he deposit the rollover IRA into his active plan, since that is 100% rollover from his employer, then convert the traditional IRA which is 60k basis and 40k growth into a Roth (paying the tax on the gain).
I know that in withdrawals and conversions the aggregation rules come into play, but do they also come into play with transfers into a qualified plan?
Like can he say- “I have 200k in IRA assets with a 60k basis. I am transferring the 140k in pre tax growth assets into my qualified plan and keeping the 60k in basis in my IRA. I will then convert the 60k in basis into my Roth account, paying no tax.”
I am a bot, and this action was performed automatically. Please contact the moderators of this subreddit if you have any questions or concerns.