Form 8606: Nondeductible IRAs
Used to report nondeductible contributions to traditional IRAs, distributions from traditional, SEP, and SIMPLE IRAs when you have a basis, and conversions from traditional IRAs to Roth IRAs.
Overview
Form 8606, Nondeductible IRAs, is used to report nondeductible contributions to traditional IRAs, distributions from traditional IRAs when you have basis (nondeductible contributions), conversions from traditional IRAs to Roth IRAs, and distributions from Roth IRAs. This form is essential for tracking your after-tax IRA contributions so you are not taxed twice.
If your income exceeds certain limits and you contribute to a traditional IRA without being able to deduct the contribution, you have made a nondeductible contribution. Form 8606 tracks these contributions as your "basis" in the IRA. When you later take distributions, only the portion above your basis is taxable.
This form is also critical when performing a Roth IRA conversion (sometimes called a "backdoor Roth"). Without properly filing Form 8606, the IRS has no record of your nondeductible contributions, and you could end up paying tax on money that was already taxed.
Who Files This Form?
You must file Form 8606 if you made nondeductible contributions to a traditional IRA, took distributions from a traditional IRA in which you have basis from nondeductible contributions, converted amounts from a traditional IRA to a Roth IRA, or took distributions from a Roth IRA (to document that the distribution is tax-free).
Even if you are not otherwise required to file a tax return, you must file Form 8606 if you made nondeductible IRA contributions. This is one of the most commonly overlooked tax forms, and failing to file it can result in a $50 penalty and, more importantly, double taxation on your contributions.
Key Fields
Line 1: Nondeductible contributions
The amount of nondeductible contributions you made to traditional IRAs for the tax year.
Line 2: Total basis in traditional IRAs
Your cumulative nondeductible contributions from prior years (carried forward from last year's Form 8606, Line 14).
Line 5: Total IRA value
The total value of all your traditional, SEP, and SIMPLE IRAs as of December 31, plus any distributions taken during the year.
Line 13: Taxable amount of distribution
The portion of your traditional IRA distribution that is taxable, calculated using the pro-rata rule.
Line 14: Remaining basis
Your basis carried forward to next year. This is the amount you track on future Form 8606 filings.
Line 16: Roth IRA conversion amount
The amount converted from a traditional IRA to a Roth IRA during the year.
Line 18: Taxable amount of conversion
The portion of the Roth conversion that is taxable (the conversion amount minus the non-taxable basis portion).
Filing Deadlines
April 15
October 15
$50 penalty for failure to file Form 8606 for nondeductible IRA contributions.
Step-by-Step Instructions
- 1
Determine your total nondeductible IRA contributions for the current year and enter on Line 1.
- 2
Enter your total basis from prior years (from last year's Form 8606, Line 14) on Line 2.
- 3
Add Lines 1 and 2 to get your total basis on Line 3.
- 4
Enter the total year-end value of all traditional, SEP, and SIMPLE IRAs on Line 5, plus any distributions and conversions.
- 5
Calculate the non-taxable percentage by dividing your total basis by the total IRA value.
- 6
If you took distributions, multiply the non-taxable percentage by the distribution amount to find the tax-free portion.
- 7
If you did a Roth conversion, complete Part II to determine the taxable portion of the conversion.
- 8
Carry your remaining basis forward to next year on Line 14.
Common Mistakes to Avoid
Not filing Form 8606 at all
Many people forget to file this form, which means the IRS has no record of their nondeductible contributions. File Form 8606 every year you make nondeductible contributions or take distributions from an IRA with basis.
Forgetting the pro-rata rule for conversions
When converting to a Roth IRA, you cannot convert only the nondeductible portion. The pro-rata rule requires you to treat the conversion as coming proportionally from both pre-tax and after-tax money across all your traditional IRAs.
Not including all IRA accounts in the calculation
The pro-rata rule considers ALL of your traditional, SEP, and SIMPLE IRAs combined. You cannot isolate one account for a tax-free conversion.
Losing track of basis from prior years
Keep copies of every Form 8606 you file. If you lose track, review prior year tax returns or request transcripts from the IRS.
Frequently Asked Questions
The pro-rata rule requires that when you take a distribution or convert from a traditional IRA, you must treat the withdrawal as coming proportionally from both taxable (pre-tax) and nontaxable (after-tax) funds across all your traditional IRAs.
Related Forms
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