What is IRA basis?
IRA basis represents the cumulative total of after-tax, nondeductible contributions made to traditional Individual Retirement Accounts throughout a taxpayer's lifetime, tracked using Form 8606 to determine the nontaxable portion of retirement distributions. When taxpayers make nondeductible contributions because their income exceeds limits for deductible IRA contributions, these amounts create a basis that reduces taxation on future withdrawals. The Traditional 401k offers similar retirement tax advantages. IRA basis calculations become particularly important for Qualified charitable distributions, where basis reduces the tax-free transfer amount available. Accurate basis tracking prevents double taxation on contributions already made with after-tax dollars while ensuring proper tax treatment of retirement account distributions over time.
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