Getting the Paperwork Right on an IRA Howard Hook, CFP®, CPA, quoted in The Star-Ledger's business column, "Biz Brain" on December 3, 2012 Question: Imagine it's the heyday of the go-go dot-com years. You are working 24/7, they are throwing bonuses, options, etc. at you and you take a windfall, run to the bank and open an IRA. Over a decade later, you realize that it was after-tax dollars, but now the account has moved from bank to bank to bank. The original paperwork is gone, you are not even sure at which bank the account was originated and you have never filed a Form 8606. Is there any way to trace the origin on this account and re-file the correct paperwork to take advantage of after-tax rates? Or just pay the tax — again? Answer: Ah yes, the dreaded recordkeeping of tax-advantaged investment accounts. It seems that you know the amount of after-tax contributions made, but you can't prove it via Form 8606 or with statements from IRA custodians, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton. “If non-taxable contributions have been made for tax years 2009 to 2011, then you can file amended returns and include Form 8606 showing the non-taxable contributions,” he said. “For earlier years, you cannot amend the returns because the statute of limitations has run out for those tax years.” Failure to file Form 8606 unfortunately will result in having to pay tax on the contributions that were made with after-tax money, Hook said. Let's go a little deeper. As you know, if you made non-deductible contributions or rolled over any after-tax amounts to your traditional IRAs, you have a cost basis or investment equal to the amount of those contributions, said Diahann Lassus, a certified financial planner and certified public accountant with Lassus Wherley in New Providence. She said these non-deductible contributions are not taxed when they are distributed to you because they are a return of your investment in your IRA. Only the part of the distribution that represents either the non-deductible contributions and/or after-tax dollars rolled over from 401(k) or other tax-deferred accounts is included in your basis. “Most folks don't want to pay taxes the first time and we definitely don't want to pay taxes twice on the same dollars,” Lassus said. It may be worth some investigating to avoid paying taxes twice. Review the front of your tax returns to verify that all the IRA contributions you made were, in fact, non-deductible, Lassus said. The 1986 Tax Reform Act established deductible versus non-deductible contributions, so from that period forward, only the non-deductible contributions count for basis. Next, try to verify what years the actual non-deductible contributions were made and in what amounts. “Look for cancelled checks or transfers from other accounts as a good starting point for constructing your basis,” she said. “Start from your current statements and track back as far as you can. Try to verify other sources of funds in your IRA such as rollovers from 401(k)s or other types of accounts which may have contained after-tax contributions.” If you track the increase in value over the years, it may also help you calculate those original contributions. Make sure you document your analysis and any information you gather. Once you can determine how much your non-deductible contributions were over the years involved, file Form 8606 form for adjusted basis. Keep documentation for backup. If you are unable to come up with a reasonable estimate, then the only alternative is to pay taxes on these dollars when you begin taking distributions, she said.