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If you are making nondeductible contributions to a traditional IRA, you already know that tax-deferred savings can help you reach your financial goals faster. But you may not be aware that it’s your job to keep track of those contributions.
Failure to do so could result in double taxation when you begin withdrawals in retirement.
“The consequences of poor IRA contribution tracking can be severe, especially for high earners,” said Armando Sallavanti, a CERTIFIED FINANCIAL PLANNER® professional with MassMutual Greater Philadelphia. “Without proper records of nondeductible contributions (your cost basis), you could end up paying taxes twice since the IRS doesn’t know your contribution was already taxed and will assume all distributions are taxable unless you can prove otherwise. Remember, the burden of proof is on you, not the IRS — without proper records, you'll likely end up paying more taxes than necessary.”
Before listing the best practices for tracking your IRA contributions, it’s important to outline the difference between deductible and nondeductible contributions, and explain why retirement savers might choose to make a nondeductible contribution at all.
Deductible vs. nondeductible IRAs
- Deductible IRA. Retirement savers most often make deductible contributions to traditional IRAs using pre-tax dollars, or, money that has not yet been taxed. They receive an immediate tax deduction in the year they contribute, but when they withdraw funds from their account during retirement both their contribution and any investment earnings they generated get taxed at their ordinary income tax rate — ideally when their tax bracket is lower.
- Nondeductible IRA. A nondeductible IRA is funded with after tax money. The account holder does not get a tax deduction when they contribute, but those dollars can then grow tax deferred. When withdrawals begin in retirement, only the investment earnings would be subject to ordinary income tax because the original contribution (their cost basis) was already taxed — assuming the account holder has records to prove it.
Why make nondeductible contributions?
Many retirement savers make both deductible (pre-tax) and nondeductible (after-tax) contributions to an IRA over the course of their career, sometimes in the same year and often blended in the same account. That can make record-keeping tricky.
So, why bother with after-tax contributions? In a word: eligibility. Income limits dictate how much you may contribute to a traditional IRA on a pre-tax basis in any given year, if at all. That, and whether you have access to a workplace retirement account.
High income earners and others who are not eligible to make a deductible contribution to a traditional IRA, or only qualify for a partial deduction, can still make nondeductible contributions to help maximize their tax-deferred retirement savings.
For 2025, the most you may contribute on either a deductible or nondeductible basis to a traditional IRA is $7,000, plus an additional $1,000 for those age 50 or older.1
“Most investors are not aware that it is their responsibility to keep track of their nondeductible contributions,” said Chad Tourin, a CERTIFIED FINANCIAL PLANNER® professional and Certified Public Accountant with Coastal Wealth in Ft. Lauderdale, Florida. “They typically think that either the custodian will do it, or the IRS will keep track, but the record keeping burden falls on them.”
Unfortunately, said Tourin, poor financial record-keeping is a common mistake, particularly among individuals who contribute sporadically to IRAs or have rolled over funds between accounts.
Once you reach age 73 (age 75 starting in 2033) when required minimum distributions (RMDs) begin, the IRS will require you to calculate the total value of all your deductible and nondeductible traditional IRA contributions, so they can determine the amount of your annual RMD. (Learn more: Turning 73? Required minimum distributions explained)
If you can’t document your after-tax contributions, the IRS will be forced to tax it again at your ordinary income tax rate.
Another reason that retirement savers sometimes choose to make after-tax contributions to a traditional IRA is that they intend to convert those savings to a Roth IRA.
Roth IRAs have no RMDs and any earnings grow tax free, so they can be a potentially powerful estate planning tool. Higher income earners generally aren’t eligible to contribute to a Roth IRA directly, but they can potentially do so indirectly by converting nondeductible traditional IRA contributions to a Roth IRA. They would still owe ordinary income tax on the earnings at the time they convert. (Learn more: Roth IRA conversions explained)
How to track your nondeductible IRA contributions
The best way to track your nondeductible IRA contributions, said Tourin, is to file IRS Form 8606 with your income tax return for every year you make a nondeductible contribution.
“Form 8606 establishes and maintains a record of your tax basis, and when combined with account statements and contribution records, creates a necessary paper trail for future tax reporting,” he said. “Without proper documentation, proving which portion of your IRA balance consists of after-tax dollars can be challenging.”
Sallavanti offers the following additional tips:
- Create a single, organized digital document to track annual contribution amounts, the dates those contributions were made, which account they went to (traditional/Roth), and whether contributions were deductible or nondeductible. This document should also be used to maintain a running total of your cost basis in each account.
- Save essential paperwork such as Form 8606 copies for nondeductible IRA contributions, year-end account statements, contribution confirmation documents, and tax returns showing IRA/retirement account activity.
- Save confirmation emails/documents immediately when making contributions, update your tracking spreadsheet monthly, review totals quarterly to catch any problems early, do an annual reconciliation with tax documents, and store everything in both digital and physical backup copies.
- Share this tracking system with your spouse and financial professionals (including your CPA) — making multiple people aware of where records are kept prevents major headaches later.
Conclusion
An organized system for managing your financial paperwork can help you avoid late fees, maintain a healthy credit score, and reduce stress. But in the case of nondeductible contributions to a traditional IRA, it can also save you money.
By filing the proper tax forms and saving essential documents that confirm your contributions, you can limit your future tax liability and ensure that you pay Uncle Sam what you owe — and nothing more.
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