Form 8606 - Jan 2022

IRS Form 8606: Nondeductible IRAs, Roth IRA conversions and filing rules

What is Form 8606?

Form 8606, Nondeductible IRAs, is the IRS form used to report after-tax money in your traditional, SEP or SIMPLE IRAs. It tracks your basis, which is the portion of contributions you have already paid tax on, so that money is not taxed a second time when you withdraw it later.

The form also reports conversions to a Roth IRA and certain Roth IRA distributions. Filing it keeps an official record with the IRS of the amounts you have already been taxed on.

Who needs to file Form 8606?

High earners doing a backdoor Roth, savers who cannot deduct a traditional IRA contribution and retirees drawing down an IRA that holds after-tax money are the most common filers. You attach the form in any year one of these events happens.

You generally need to file Form 8606 if you:

• Made a nondeductible contribution to a traditional IRA
• Converted a traditional, SEP or SIMPLE IRA to a Roth IRA
• Took a distribution from a traditional, SEP or SIMPLE IRA while you had basis
• Took certain distributions from a Roth IRA

The account owner is responsible for filing, not the bank or brokerage that holds the IRA.

Do Roth IRA contributions go on Form 8606?

This is a common point of confusion. Regular annual contributions to a Roth IRA are not reported on Form 8606, and you cannot deduct them on your return either.

The form's main job is tracking after-tax dollars inside traditional IRAs. It only touches Roth accounts when you convert money into one or take an early or otherwise nonqualified Roth distribution.

Do you file Form 8606 with your tax return?

Yes. In most cases Form 8606 is an attachment to your Form 1040, and when you e-file it is transmitted electronically with the rest of your return. It is not mailed on its own in the typical case.

You can file Form 8606 by itself only when you are not otherwise required to file a tax return. Late or missed forms for prior years are usually filed alone or attached to an amended return, Form 1040-X.

Does tax software file Form 8606 automatically?

Not on its own. Programs like TurboTax only generate the form when you enter your contributions, conversions or distributions in the right place, so the responsibility still sits with you.

Backdoor Roth filers are caught out here most often. After finishing your return, check that Form 8606 is included and that the taxable amount of any conversion looks correct before you file.

Is Form 8606 required every year?

No. You only file it for years in which you have a reportable event such as a nondeductible contribution, a Roth conversion or a distribution from an IRA that holds basis. In quiet years you file nothing.

Your basis carries forward from one filing to the next, so keep every Form 8606 you submit. You need last year's figures to complete the next one accurately.

What is the penalty for not filing Form 8606?

Missing the form can cost you in two ways. There is a $50 penalty for failing to file when required and a $100 penalty for overstating your nondeductible contributions, unless you can show reasonable cause.

The bigger risk is financial. Without a record of your basis the IRS treats withdrawals as fully taxable, so you can end up paying tax again on money you already paid tax on. There is no deadline that stops you filing a late Form 8606 to fix this.

Common mistakes to avoid

• A few recurring errors trip up filers and can quietly raise their tax bill. Watching for these protects the basis you have built up.
• Skipping the form after a backdoor Roth and paying tax on the conversion twice
• Ignoring the pro-rata rule, which treats all your traditional, SEP and SIMPLE IRAs as one pool
• Throwing away prior year forms and losing the running record of your basis
• Assuming Form 8606 is only for Roth accounts when its core purpose is traditional IRA basis

Need to file Form 8606?

Lumin provides a fillable Form 8606 template that makes it easy to report nondeductible IRA contributions, Roth IRA conversions and IRA distributions. Fill in the required information, review the form, then download it when it's ready to submit. Get started with Lumin for free.