Are you confident you’re not paying taxes twice on your IRA contributions? Tax preparation isn’t just about filing forms; it’s about making smart moves that save money. Form 8606 is one of the most overlooked tools when managing nondeductible contributions to IRAs and planning tax-efficient retirements.
According to recent financial data, a significant percentage of U.S. households with traditional IRAs or Roth IRAs contribute annually, underscoring Americans' investment in their retirement future. In this article, you’ll learn why IRS Form 8606 matters, how it impacts your taxes, and how to avoid common mistakes that can cost taxpayers thousands of dollars. We'll ensure this information remains relevant for any tax year, including 2025 and beyond.
What Is IRS Form 8606 and Why Should You File It?
What is Form 8606 used for in tax filing?
Form 8606, "Nondeductible IRAs," is a crucial tax form provided by the Internal Revenue Service (IRS). You’ll need to use Form 8606 if you’ve made nondeductible contributions to a traditional IRA. This also includes conversions from a traditional IRA to a Roth IRA, or receiving a distribution from Roth IRAs or any traditional IRAs that include after-tax money.
In simple terms, you use Form 8606 to report:
- Any nondeductible contributions you made to traditional IRAs. This is the primary function of Part I of the form. These are IRA contributions for which you did not receive a tax deduction.
- A conversion from a traditional IRA, SEP IRA, or SIMPLE IRA to a Roth IRA. This is often referred to as a "backdoor Roth IRA" strategy and is reported in Part II.
- A distribution from a traditional IRA, SEP IRA, or SIMPLE IRA that includes after-tax funds (i.e., nondeductible contributions).
- A non-qualified Roth IRA distribution involves withdrawing earnings from a Roth IRA before meeting the requirements for tax-free qualified distributions (usually reported in Part III).
If you don’t file Form 8606 with your Form 1040, the IRS may assume the entire IRA distribution from your traditional IRA is taxable income. That means you could pay income tax on already-taxed money, essentially double taxation. You’d also miss your chance to properly track your basis (your after-tax portion) in your retirement account (IRA).
When are you required to file IRS Form 8606?
You must file Form 8606 in any tax year you:
- Make nondeductible contributions to a traditional IRA for the tax year.
- Convert from a traditional IRA to a Roth IRA, or from a SIMPLE IRA to a Roth IRA. This is required even if the conversion amount consists entirely of nondeductible contributions.
- Take a distribution from a traditional IRA, SEP IRA, or SIMPLE IRA and you have a basis (i.e., you've ever made nondeductible IRA contributions) in these IRAs.
- Receive distributions from Roth IRAs that are not fully qualified (meaning a portion of the earnings might be taxable or subject to penalty).
- Take a distribution from an inherited IRA with a basis above zero for IRA assets.
It's critical to understand the long-term impact: If you’ve ever made nondeductible contributions to a traditional IRA in the past, you are required to file Form 8606 when you take any distribution from any traditional IRA, SEP IRA, or SIMPLE IRA in subsequent years, until all your basis has been recovered.
The consequences of not filing IRS Form 8606 are serious. Not only will you likely pay income tax again on amounts that should’ve been tax-free, but you may also face a $50 penalty for failure to file Form 8606 unless you can show reasonable cause. There's also a potential $100 penalty if you overstate your nondeductible contributions.
How Do IRA Contributions Affect Form 8606 Reporting?
What counts as a nondeductible IRA contribution?
A nondeductible IRA contribution is a contribution to a traditional IRA that you cannot, or choose not to, deduct on your individual income tax return. This typically occurs if your income exceeds certain limits set by the IRS for traditional IRA tax deductions, or if you are covered by a retirement plan at work and your income is above the phase-out thresholds. The maximum IRA contribution for 2025 remains $7,000, or $8,000 if age 50 or older.
Filers who make nondeductible contributions must file Form 8606 to notify the IRS that the contribution is nondeductible and establish their basis. These also include:
- Contributions made to a traditional IRA are not deducted due to income limits.
- Repayments of qualified disaster or birth/adoption IRA distributions are treated as nondeductible contributions.
- After-tax rollovers from an employer retirement plan (like a 401(k)) into a traditional IRA.
If you skip this reporting, the nondeductible contribution amount won’t be on record with the IRS. When you eventually withdraw the money from your IRA, the IRS will assume it's all pre-tax money, and you’ll pay income tax on it again. This highlights why accurate reporting via Form 8606 is essential for tax savings.
How does Form 8606 impact traditional IRA vs Roth IRA contributions?
- For Traditional IRAs: Form 8606 is vital for tracking your after-tax basis. This basis represents the cumulative total of all your nondeductible contributions. When you take an IRA distribution, the form is used to prorate the taxable and non-taxable amounts. This proration is based on the ratio of your total basis to the aggregate balance of all your traditional IRAs, SEP IRAs, and SIMPLE IRAs at year-end. Without this, the IRS will generally tax the entire distribution as if it were all pre-tax money.
- For Roth IRAs: While you don't use Form 8606 to report regular Roth IRA contributions (as all Roth IRA contributions are after-tax), you use Form 8606 if a Roth IRA distribution is non-qualified (meaning it includes earnings withdrawn early or before meeting the five-year rule). In such cases, you’ll use Part III of Form 8606 to figure out what portion of the distribution is subject to income tax and potentially the additional 10% early distribution penalty tax.
In short, you need to use Form 8606 to report distributions correctly, especially if you made nondeductible IRA contributions in the past or completed an IRA to a Roth IRA conversion.
How Does Form 8606 Work with IRA Distributions and Conversions?
How do IRA distributions get taxed with Form 8606?
If your traditional IRA assets include both pre-tax and after-tax money (your basis), any IRA distribution from any of your traditional IRAs must be prorated. You can’t simply choose to withdraw only the after-tax funds first. Form 8606 in a distribution year calculates the taxable vs. non-taxable portion based on the total value of all your traditional IRAs, SEP IRAs, and SIMPLE IRAs as of December 31st of that tax year.
Here’s a simplified example: Let’s say you made nondeductible contributions totaling $5,000 to your traditional IRA over the years (this is your basis). By year-end, the combined total of all your traditional IRAs (including SEP and SIMPLE IRAs if you have them) is $25,000. If you withdraw an IRA distribution of $5,000 during the tax year, Form 8606 helps you prorate the taxable amount:
- Your basis ($5,000) is 20% of your total IRA value ($25,000).
- Therefore, 20% of your $5,000 distribution ($1,000) is considered a return of your after-tax basis and is non-taxable.
- The remaining 80% ($4,000) is considered pre-tax money and is taxable income.
If you don’t file Form 8606, the IRS assumes the entire $5,000 distribution is taxable, and you unnecessarily pay tax on the $1,000 that should have been tax-free. This illustrates the critical importance of keeping accurate records of your nondeductible IRAs.
How does a traditional IRA to a Roth IRA conversion affect your taxes?
When you move money from a traditional IRA to a Roth IRA, you are generally performing what's known as a Roth IRA conversion. This action usually triggers a taxable event, as pre-tax amounts are converted to after-tax Roth status. However, if part of that money was already taxed—say, it originated from a nondeductible contribution—you shouldn’t have to pay tax on that portion again.
That’s where Form 8606 is also essential. It allows you to track and report how much of the conversion from a traditional IRA or SIMPLE IRA to a Roth was already sourced from your after-tax basis. This ensures you only pay tax on the pre-tax portion of the converted amount.
Important for conversions:
- You must complete Form 8606 (specifically Part II) if you convert any amount from a traditional IRA, SEP IRA, or SIMPLE IRA to a Roth IRA. This includes "backdoor Roth IRA" conversions.
- Form 8606 ensures you correctly calculate what portion of the converted amount is taxable and what portion is tax-free (your basis).
If you skip this form, the IRS will assume the entire converted amount was pre-tax and will tax the full amount of your conversion, even the part you’ve already paid income tax on. This oversight could cost you thousands in unnecessary taxes, negating much of the benefit of a Roth IRA in the first place.
How to Properly Fill Out and File IRS Form 8606
What are the steps to complete IRS Form 8606 correctly?
To stay in the IRS’s good graces and avoid overpaying taxes, correctly completing Form 8606 is paramount. The form is divided into three main parts:
- Part I: Nondeductible Contributions to Traditional IRAs and Distributions From Traditional, SEP, and SIMPLE IRAs. You complete this section if you’ve made nondeductible contributions to an individual retirement account or taken a distribution from one that includes basis. This section helps the IRS track your cumulative after-tax basis across all your traditional IRAs.
- Part II: Conversions From Traditional, SEP, or SIMPLE IRAs to Roth IRAs. You fill this out if you converted any amount from a traditional IRA, SEP IRA, or SIMPLE IRA to a Roth IRA. This section calculates the taxable portion of your conversion.
- Part III: Distributions From Roth IRAs. You complete this if you took a distribution from a Roth IRA that may be taxable (e.g., an early distribution of earnings before the 5-year rule is met).
If you’re unsure which parts apply to your situation, carefully review your IRA transactions for the tax year. If you’re working with an accountant or using tax filing software, ensure they include Form 8606 with your Form 1040.
Crucially, you generally only need one Form 8606 per tax year, even if you had multiple IRA activities (e.g., both a nondeductible contribution and a conversion). However, you must file Form 8606 for every tax year you have these specific transactions.
What are the consequences of not filing Form 8606?
The penalties and financial drawbacks of failing to file Form 8606 can be significant:
- Double Taxation: You’ll likely pay income tax again on your nondeductible contributions when you take a distribution, effectively losing the tax-free portion.
- Lost Basis: The IRS will assume you have no basis in your traditional IRAs, meaning 100% of future distributions will be deemed taxable, regardless of past after-tax contributions.
- Penalties: You may owe a $50 penalty for not filing Form 8606 when required, unless you can show reasonable cause. Additionally, if you misstate your after-tax amount without reasonable cause, a $100 penalty may apply.
- Early Distribution Penalties: The IRS could also assess the 10% early distribution penalty tax on amounts that would’ve been excluded from tax (e.g., your basis) if you had properly reported them.
If you’ve skipped this form in past years, it’s not too late to correct it. You can file Form 8606 retroactively by sending it to the IRS or filing an amended tax return (Form 1040-X) for the relevant years. Either way, use Form 8606 to correctly report your after-tax IRA activity moving forward to protect your retirement savings.
Key Takeaways for Your IRA and Tax Strategy
- Form 8606 is a critical tax form that protects you from paying tax twice on your nondeductible IRA contributions.
- You must file Form 8606 if you made nondeductible contributions to a traditional IRA, converted a traditional IRA to a Roth IRA, or took a distribution from an IRA that includes after-tax funds.
- Use Form 8606 to report and properly prorate taxable vs. non-taxable IRA distributions.
- Failure to file Form 8606 can trigger IRS penalties and unnecessary income tax on your retirement savings.
- Always include Form 8606 with your Form 1040 when required, for every relevant tax year, to ensure accurate reporting of your IRA basis.
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