August 12, 2021

Individuals that earned income throughout the tax year have the option to make non-deductible (after-tax) contributions to an IRA and benefit from tax-deferred growth. One of the most common risks that taxpayers take is paying additional taxes when withdrawing their money from their retirement accounts. Before making after-tax contributions to a traditional IRA, it is important for taxpayers to have an understanding of the rules and how to avoid the double tax trap on withdrawals.

There are certain contribution rules and limits that most taxpayers are not aware of with the IRA withdrawal process. Here are the rules taxpayers need to know about when making non-Roth after-tax IRA contributions:

  • Individuals are required to have earned an income.
  • The deductibility phase-out is determined on the filing status, income, and whether or not an individual is eligible to participate in a retirement plan at work.
  • Contribution limits are the lesser of: $6,000 (plus $1,000 if age 50+) or earned income and apply to aggregate additions to IRAs.

Certain financial institutions where an IRA is kept could cause certain issues such as the institution restricting an individual to add more than $6,000 per tax year. Banks also do not track, report, or verify if an individual made a pre-tax or non-deductible IRA contribution. The responsibility is left up to the taxpayer.

For those who choose to make after-tax contributions to an IRA, are required to give the IRS a heads up that they have already paid taxes on those dollars by using Form 8606. Individuals who fail to report, track, and file the form will most likely lose the ability to shield part of their IRA withdrawal from a tax penalty when the money is withdrawn.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.