As of 2011, the maximum annual contribution to a Roth or traditional IRA is $5,000, or $6,000 if you are 50 or older, as long as you had at least that amount in income. Roth IRA contributions are not deductible, but qualified distributions -- generally after age 59 1/2 -- are tax free. Contributions to a traditional IRA are fully tax deductible unless you or your spouse are covered under a plan through an employer. In that case, while you can still contribute up the to maximum amount, the deduction may be phased out or disappear, depending on your adjusted gross income (AGI). The portion of your distribution attributable to contributions on which you have already been taxed will then be tax free. Therefore it is important to have a record.
Collect all of the contribution forms your IRA custodian has sent you. These will be labeled as IRS Form 5498. You should have one for each year that you have had the IRA. Arrange them in order, from the first year to the present. Also gather your income tax papers for each year.
Contact the custodian of your IRA if you can’t find some or all of your 5498 forms. The custodian is the entity that is holding your IRA, typically a bank or a brokerage house. Request copies of the missing forms. If you are missing any of your income tax forms, request copies from your accountant or request the information directly from the IRS.
Review each of your tax filings. You should have filed Form 8606 if you had non-deductible IRA contributions for that year. You can also check your 5498 forms that show your entire contribution for a specific year. By comparing your contribution with the allowable deduction for that year based on your AGI, you can calculate the taxable portion.
Identify each year where the non-deductible contributions were made. If you didn’t file a Form 8606 for each relevant year, you will need to file the form retroactively. This lets you be certain that the IRS treats the contributions appropriately, and you don’t end up paying taxes on the money a second time, when you take distribution of those funds.
- Once you have paid taxes on IRA contributions you will be able to take distribution of those funds – but not their earnings – tax free when you begin to receive payments from your IRA. Keep all proof in case you are questioned about the tax status of your contributions.
- If you can’t show proof of having paid taxes on IRA contributions, you may be required to treat them as regular income when you take distribution of the funds. Keep all of your documentation in a safe place.
Items you will need
- IRS Form 5498 for each year of your IRA
- List of annual IRA contribution limits, by year
- Income tax forms, all pages
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