Managing my IRA Basis

You should have been filing a 8606 each with tracks the proportional already-taxed to tax-deferred. When you remove funds in the future, you must presume the porportion at that time will be removed from eache category. Then tax will have to paid on the deferred part. And the 8606 for that year will have to updated to show the decrease in the taxable part. The pain is that 8606s have to be filed until the account is emptied, which could be many decades.

Like so many other things, it comes down to a cost benefit analysis. Is the amount you would save on taxes worth the bookkeeping? But really, how much extra work is it? You have to file a form 8606. Tax software will do that for you. You need to keep track of your basis, too, but assuming you keep your tax returns, you're doing that already.

I don't think the IRS would agree with you. You would essentially be claiming the deduction you were not allowed in the first place. That is most certainly material. Besides, that's a lot of risk for relatively little reward.

If you're eligible, you could convert to a Roth. It sounds like you have quite a sum in your IRA, in which case you wouldn't want to do this all at once. And you'd have to continue to file an 8606 every year until the conversion was done. But when the conversion was complete, you'd have no pre-tax money left, so you'd be done with the

"Several years" at $2k/year would be around $5,000, let's say.

"A lot of bookkeeping" equals a few simple arithmetic calculations (basis divided by year-end balance, times annual distribution amount, then subtract after-tax distribution from basis). Going forward, you only file the 8606 in years you take a distribution, as already mentioned it's automatic with tax software. You already know the basis, and the custodian sends you (and the IRS) the year-end balance.

Combined federal and state taxes would be from 15% to 30% of $5,000. That's a pretty hefty donation, or another way to look at it, your time spent on the bookkeeping could be valued at a rate of approximately $1,000/hour. Now, if you happen to live in a state that didn't always conform to federal IRA deductiblity, I admit that could increase your bookkeeping requirements somewhat.

Wow, what a concept. Why doesn't everybody handle their taxes that way? Seriously, exactly which line of your income tax return are you going to claim this adjustment on?

-Mark Bole

Looks like a lot of accountants follow this thread.

BTW this not a deduction or tax avoidance. It is moving money that has been taxed from a pre-tax account to an after tax acount. The only issue is do I do it in 1 year or 20 years.

Understood. However the tax law does not allow you a choice. In fact quite a few tax laws are expressly designed to force you to do over many years what you might otherwise want to do in one year.

-Mark Bole

How do you propose recognizing your basis over a year or two?

Dave