When to File Form 8606?
If a taxpayer made contributions to a traditional nondeductible IRA or a Roth IRA in the past tax year; took distributions from a traditional, SEP, or SIMPLE IRA; converted from a traditional, SEP, or SIMPLE IRA to a Roth IRA, either in whole or in part; or took a distribution from your Roth IRA, The will need to complete Form 8806, Nondeductible IRAs, and attach it to their tax return. The tax Form 8606 is more important today because of the popularity of the Roth IRA and the rollover eligibility of after-tax assets from qualified plans. It is vital to accurately record contributions to nondeductible IRAs.
Nondeductible IRAs (Form 8606)
Any money you contribute to a traditional IRA that you do not deduct on your tax return is a “nondeductible contribution.” You still must report these contributions on your return, and you use Form 8606 to do so. Reporting them saves you money down the road. That’s because no individual’s money is supposed to be subject to federal income tax twice. Form 8606 gets it “on the record” that a portion of the money in your IRA has already been taxed. Later on, when you take distributions, a portion of the money you get back will not be subject to income tax.
Forgetting to File Form 8606
A taxpayer must file Form 8606 to report nondeductible contributions even if they are not required to file a tax return for the year. If you file a Form 1040, there’s a $50 penalty for not attaching your 8606. In addition, if your IRA contributions are more than permissible amounts, you may be subject to a 6 percent penalty, and you must withdraw the overpayment. This penalty can be easily avoided and that is why it is essential to correctly file IRS Form 8806 to report non-deductible IRA contributions.
Keeping Track of Form 8606
That being said, the most common mistake made with non-deductible IRAs is forgetting to complete IRS form 8606 with your tax return. Remember, that if you have made non-deductible IRA contributions but did not report your basis, you can report it in arrears on this form. Although Form 8606 is normally submitted with a timely filed Form 1040, the IRS will process a late-filed Form 8606 – even one that is filed after the normal three-year statute of limitations for claiming a refund has expired. The Form 8606 can be submitted without a Form 1040 or Form 1040X.
IRS Links Related to Form 8606 for Non-deductible IRA
Use this Form 8606 to report:
Form 8606 is not just for reporting nondeductible contributions to traditional IRAs. You also use it to report other IRA-related transactions where the government needs to track the status of your money — whether it’s been taxed or untaxed. Form 8606 is also used when you:
- Nondeductible contributions you made to traditional IRAs;
- Distributions from traditional, SEP, or SIMPLE IRAs, if you have ever made nondeductible contributions to traditional IRAs;
- Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs; and
- Distributions from Roth IRAs
Remember, filing form 8606 could mean tax savings, while failure to file could result in paying the IRS tax and penalties on amounts that are actually tax- and penalty-free.