Tracking the cost basis of your non-deductibe IRA contributions is very important. If you were to convert them to a ROTH IRA you would need to demonstrate that the payments are post-tax, otherwise you would owe income tax on them.
The federal government tracks your non-deductible tax basis on form 8606, which is submitted with your annual tax return.
I was unaware of this. Actually my accountant and I made a mistake and the form was never submitted for 2005. My accountant told me it would not be much work to revise the 2005 submission - I wonder how much extra it will cost me?
Here is the IRS information on form 8606:
Form 8606 keeps track of non-deductible contributions to a retirement plan. See the link below for more information on form 8606. Anytime you have a question on any tax forms you can always check out http://www.irs.gov/. They list every form and instructions for each which explains their purpose.
If you make non-deductibe contributions, keep a sharp eye on this.
Hmm... why are we making non-deductible contributions? Due to recent tax law changes (2006), high income earners are allowed to convert IRAs into Roth IRAs in 2010. Buy making post-tax contributions, I won't have to pay income tax on the basis when I convert from a traditional IRA to a Roth IRA.
One of the techniques to minimize growth on the gains is to transfer the gains and any pre-tax contributions to other accounts before the conversion. I'm not sure how well that technique will work, but I'll certainly try it.
Have a wonderful day,