form 8606

[imjulier]

Good morning-

Client made non-deductible contribution to a traditional IRA of $6,000. Client is also taking normal distributions from a couple annuities that are marked as being "IRA/SEP/Simple" on form 1099R. Forms 1099R for these are $6,126. I thought form 8606 would simply say that the $6,000 of non-deductible contribution occurred to establish the basis in the IRA going forward. But, if you actually follow form 8606, because amounts were distributed, a portion of the distributions come up as non-taxable. The distributions were not rolled-over. I can obviously just follow the form and come up with an answer but would like to understand the logic. Is this correct? Why would some of the distribution become non-taxable? What is the basis in the iRA going forward....the $6,000 non-deductible contribtion or the difference between the $6,000 and the amount of the non-taxable distribution of about $3,000 (leaving $3,000 basis)? I just haven't had this happen before because usually people don't contribute to a traditional unless it will be deductible.

Thanks for any lightbulbs your responses might produce.

Julie

[Lion EA]

Figure their ratio of nondeductible to total IRAs at 31 December 2009. Use that ratio on any distributions to compute the taxfree part. Do I have that date right? Someone will hop in with the real story. And, there usually is NOT any logic, it's just the law!

[RitaB]

Yeah, I agree with the date, and I guess the idea is to make the taxpayer recover the nondeductible part throughout eternity.