Title: What Is IRS Form 8606 (Nondeductible IRAs)? — A Practical Guide
Brief overview
Form 8606, “Nondeductible IRAs,” is the IRS form used to report:
– Nondeductible (after‑tax) contributions to traditional IRAs,
– Conversions from traditional/SEP/SIMPLE IRAs to Roth IRAs, and
– Distributions from IRAs that are partly attributable to nondeductible contributions (so part of the distribution is tax‑free).
You must file a separate Form 8606 for every tax year you have nondeductible IRA activity that year. The form documents your “basis” (already taxed amount) in IRAs so future distributions and conversions are taxed correctly. (IRS, Instructions for Form 8606; Investopedia)
Key takeaways
– File Form 8606 whenever you make nondeductible traditional IRA contributions, convert any traditional/SEP/SIMPLE IRA to a Roth IRA, or take an IRA distribution that includes nondeductible contributions. (IRS, Instructions for Form 8606)
– Failing to file when required can make otherwise nontaxable dollars fully taxable and may trigger penalties. (IRS, Instructions for Form 8606)
– You must aggregate all traditional, SEP, and SIMPLE IRAs to compute the taxable and nontaxable portions of a distribution or conversion. (IRS, Instructions for Form 8606)
Who must file Form 8606
File Form 8606 for the year if any of the following apply:
– You made nondeductible (after‑tax) contributions to a traditional IRA for that year.
– You converted any amount from a traditional, SEP, or SIMPLE IRA to a Roth IRA in that year.
– You received a distribution from a traditional, SEP, or SIMPLE IRA and you have a nonzero basis (previous nondeductible contributions) in any of those IRAs.
– You took certain distributions from a Roth IRA converted within the last five years (see IRS instructions for details).
When to file
– File Form 8606 with your Form 1040 or 1040NR by the normal due date (including extensions). If you aren’t required to file Form 1040 but must file Form 8606, sign and mail Form 8606 to the IRS in the place you would otherwise file a 1040. (IRS, Instructions for Form 8606)
Basic concepts to understand before you fill the form
– Basis: The total nondeductible contributions you have made to traditional IRAs (already taxed amounts). Basis carries forward and reduces taxable income when you take distributions.
– Aggregation rule: For purposes of determining taxable vs nontaxable portion, the IRS treats all your traditional, SEP, and SIMPLE IRAs as one combined balance. That means you cannot isolate basis in a single IRA — all accounts are aggregated. (IRS, Instructions for Form 8606)
– Conversion vs. recharacterization:
– Conversion: Moving money from a traditional (pre‑tax) IRA to a Roth IRA. Conversions are generally taxable to the extent funds were not taxed before. Conversions are reported on Form 8606 and can generate taxable income in the year of conversion.
– Recharacterization: Treating a contribution originally made to one type of IRA as if made to the other (for example, moving a contribution from a traditional IRA to a Roth IRA). You can recharacterize traditional vs. Roth contributions up to the tax filing deadline (including extensions). Note: Since 2018 you may not recharacterize a conversion (Tax Cuts and Jobs Act). Make sure you use the correct term and process. (IRS, IRA FAQs; IRS, Instructions for Form 8606)
How to complete Form 8606 — practical steps
Form 8606 is divided into parts that you complete depending on your situation. Below are practical, simplified steps. Always refer to the official instructions when completing the form.
Step 1 — Gather information
– Total nondeductible contributions you’ve made this year.
– Your total basis (cumulative nondeductible contributions) in traditional IRAs at the start of the year (from prior years’ Form 8606).
– Total value of all traditional, SEP, and SIMPLE IRAs as of the date of any distribution or conversion (and any distributions or conversions during the year).
– Amount converted to Roth IRA (if any).
– Distribution amounts taken during the year (if any).
Step 2 — Which parts of the form apply?
– Part I — Nondeductible contributions and basis (used if you made nondeductible contributions or are tracking your basis).
– Part II — Conversions from traditional/SEP/SIMPLE IRAs to Roth IRAs (used if you converted funds).
– Part III — Distributions from IRAs where a basis exists (used if you received distributions and you have nondeductible contributions on record).
Step 3 — Compute taxable/nontaxable amounts (the prorating rule)
For distributions and conversions, the taxable portion is calculated using a prorating formula because all IRAs are aggregated.
Formula (conceptual):
Nontaxable portion of distribution or conversion = distribution or conversion amount × (basis in all traditional IRAs / total value of all traditional, SEP, and SIMPLE IRAs at the time of distribution/conversion)
Taxable portion = distribution or conversion amount − nontaxable portion
Example:
– Beginning basis (prior nondeductible contributions): $5,000
– Total value of all traditional/SEP/SIMPLE IRAs at time of distribution: $25,000
– Distribution taken: $10,000
Nontaxable portion = $10,000 × ($5,000 / $25,000) = $2,000
Taxable portion = $10,000 − $2,000 = $8,000
(Use the lines and calculations in Form 8606; the IRS instructions walk through each step.) (IRS, Instructions for Form 8606)
Step 4 — Report conversions
– If you converted a portion (or all) of an IRA to a Roth, use Part II to report the conversion amount and compute the taxable portion using the same aggregation/prorata rule.
– Conversions generate ordinary income to the extent the converted funds were not previously taxed.
Step 5 — File with your tax return
– Attach Form 8606 to your Form 1040/1040NR and retain a copy for your records. If you’re not filing a return but must file Form 8606, mail it signed as instructed by the IRS. (IRS, Instructions for Form 8606)
What happens if you don’t file Form 8606 when required
– If you don’t file Form 8606 for a year you must, the IRS may treat your previously nontaxable amounts as if they were taxable when distributed — meaning money that should have been tax‑free could be taxed. Penalties for failing to file may also apply. If you realize you missed filing, correct it as soon as possible. (IRS, Instructions for Form 8606)
How to correct missed Form 8606 filings
– If you failed to file in an earlier year, you generally should file an amended return using Form 1040‑X and attach the missing Form 8606 for the year in question. If you’re outside the period for amending that tax year to change tax liability, you should still file Form 8606 to establish the correct basis record. See IRS guidance on amended returns. (IRS, About Form 1040‑X; IRS, Instructions for Form 8606)
Recordkeeping checklist (what to keep and why)
– Copies of Form 8606 each year you file it — this is your official record of IRA basis.
– Yearly brokerage or custodian statements showing IRA balances, contributions, conversions, and distributions.
– Confirmation statements of conversions or recharacterizations.
– Keep records indefinitely — basis carries forward and matters years later when you take distributions.
Practical tips and common scenarios
– If you’re a participant in an employer retirement plan and your MAGI prevents you from deducting traditional IRA contributions, you can still make nondeductible contributions — but always file Form 8606 to track basis.
– Even small nondeductible contributions matter: if you fail to file Form 8606, the IRS could tax those dollars on distribution.
– Converting to a Roth can be a good strategy (pay taxes now so distributions are tax‑free later) — but you must report conversions on Form 8606. Plan for the immediate tax bill.
– If you plan to do a “backdoor Roth” (make nondeductible traditional IRA contribution then convert to Roth), Form 8606 is essential — incorrectly reporting or skipping the form will create tax headaches. Follow the IRS instructions carefully or consult a tax professional.
When a tax professional can help
– If you have multiple years of undisclosed nondeductible contributions or complex conversions, consult a tax professional to compute correct basis, prepare amended returns if needed, and avoid unnecessary taxes and penalties.
– Professional help is strongly recommended for backdoor Roths, multiple IRA accounts, and situations involving rollovers from employer plans.
Where to find the official forms and instructions
– Form 8606 and Instructions for Form 8606 — IRS website (search “Form 8606 IRS instructions”).
– IRS IRA FAQs — go to the IRS site and search “IRA FAQs.”
– About Form 1040‑X — IRS page for amending returns.
Sources
– Internal Revenue Service, Instructions for Form 8606.
– Internal Revenue Service, IRA FAQs.
– Internal Revenue Service, About Form 1040‑X, Amended U.S. Individual Income Tax Return.
– Investopedia, “Form 8606” overview.
If you want, I can:
– Walk through a personalized example with your numbers (basis, balances, distribution/ conversion amounts) and show the Form 8606 calculations, or
– Provide a short checklist and sample completed Form 8606 lines for a typical backdoor Roth year. Which would you prefer?