What Is Form 8606?

Internal Revenue Service (IRS) Form 8606, "Nondeductible IRAs," is used by filers who make nondeductible contributions to an individual retirement account (IRA). A separate form should be filed for each tax year that nondeductible contributions are made.

Normally, contributions to an IRA are deductible from ordinary income. In some circumstances, however, people who participate in an employer retirement plan and whose households exceed a threshold of modified adjusted gross income (MAGI) might not be able to make these deductible contributions, though they can still contribute to an IRA.

Key Takeaways

  • Filers who make nondeductible contributions to an IRA use IRS Form 8606.
  • Any taxpayer with a cost basis above zero for IRA assets should use Form 8606 to prorate the taxable vs. nontaxable distribution amounts.
  • File Form 8606 with Form 1040 or 1040NR by the due date, including due dates for extensions.
  • If taxpayers do not file Form 8606 in a distribution year, he or she may be required to pay income taxes (and possibly penalties) on what could be tax-free monies.

Who Can File an 8606?

Participants should file Form 8606 in conjunction with the standard income tax forms (1040 or 1040NR) for individual filers. Any taxpayer with a cost basis above zero for IRA assets (a combination of post- and pre-tax contributions, or deductible and nondeductible contributions) should use Form 8606 to prorate the taxable vs. nontaxable distribution amounts.

If the taxpayer does not file IRS form 8606 in a distribution year, income taxes (and possibly penalties) may be due. What would ordinarily be tax-free money is now taxable.

Re-characterizing an IRA

Younger investors should consider "re-characterizing" traditional and Simplified Employee Pension (SEP) IRA assets as Roth assets. Assets that are so re-characterized are immediately taxable as ordinary income; money placed into a traditional or SEP IRA has usually never been taxed. When money comes out of a traditional or SEP IRA, it becomes taxable. Already-taxed money is not taxed when it comes out of the account.

Not having to pay taxes on future distributions may outweigh the immediate tax bill caused by the re-characterization, Investors should speak with a tax professional before attempting a re-characterization.

Form 8606 is also required whenever: 1) a taxpayer converts a traditional or SEP IRA to a Roth IRA, or 2) receives an IRA distribution that is attributable to previous nondeductible contributions.

How to File Form 8606

File Form 8606 with Form 1040 or 1040NR by the due date, including due dates for extensions. If you're not required to file an income tax return but are required to file Form 8606, sign Form 8606 and send it to the IRS at the same time and place you would otherwise file a 1040 or 1040NR. Generally, after a taxpayer files their return, they can change a nondeductible contribution to a traditional IRA to a deductible contribution (or vice versa) within the time limit for filing Form 1040X, "Amended U.S. Individual Income Tax Return."