What Is Form 8606?
Let me explain IRS Form 8606, known as 'Nondeductible IRAs.' You use this form if you've made nondeductible contributions to your individual retirement account (IRA). File a separate one for each tax year you make those contributions.
Usually, IRA contributions are deductible from your ordinary income. But if you participate in an employer retirement plan and your household's modified adjusted gross income (MAGI) exceeds certain thresholds, you might not deduct them, though you can still contribute.
Key Takeaways
- You use IRS Form 8606 if you make nondeductible contributions to an IRA.
- If your IRA assets have a cost basis above zero, use Form 8606 to prorate taxable versus nontaxable distribution amounts.
- File Form 8606 with your Form 1040 or 1040NR by the due date, including extensions.
- Not filing Form 8606 in a distribution year could mean paying income taxes and penalties on money that should be tax-free.
Who Can File an 8606?
You should file Form 8606 along with your standard income tax forms like 1040 or 1040NR if you're an individual filer. If your IRA assets have a cost basis above zero—from a mix of post- and pre-tax or deductible and nondeductible contributions—use it to figure out the taxable and nontaxable parts of distributions.
If you skip filing Form 8606 in a year you take distributions, you might owe income taxes and penalties on amounts that would otherwise be tax-free.
Re-characterizing an IRA
If you're a younger investor, think about re-characterizing your traditional or Simplified Employee Pension (SEP) IRA assets as Roth assets. When you do this, those assets become immediately taxable as ordinary income, since money in a traditional or SEP IRA typically hasn't been taxed yet. Withdrawals from traditional or SEP IRAs are taxable, but already-taxed money isn't taxed again when withdrawn.
The benefit of not paying taxes on future distributions might make the upfront tax hit worthwhile. Always consult a tax professional before you try re-characterizing.
Important Note
You also need Form 8606 whenever you convert a traditional or SEP IRA to a Roth IRA, or if you receive an IRA distribution tied to previous nondeductible contributions.
How to File Form 8606
File Form 8606 with your Form 1040 or 1040NR by the due date, including any extensions. If you don't need to file an income tax return but must file Form 8606, sign it and send it to the IRS at the same time and place as you would a 1040 or 1040NR.
After filing your return, you can generally change a nondeductible contribution to a traditional IRA to a deductible one (or the reverse) within the time limit for filing Form 1040X, the amended return.
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