Form 8606: Nondeductible IRAs — What it is and how it works

Form 8606, “Nondeductible IRAs,” is the IRS form used to report nondeductible contributions to traditional IRAs and to track the basis (after‑tax contributions) in IRA accounts. It is also used when converting traditional or SEP IRAs to Roth IRAs and to determine the nontaxable portion of distributions.

Key points

• File a separate Form 8606 for each tax year you make nondeductible IRA contributions.
• Any taxpayer with a cost basis greater than zero in IRA assets must file Form 8606 to prorate taxable versus nontaxable distributions.
• Form 8606 must be filed with Form 1040 or 1040‑NR by the tax‑return due date (including extensions). If you’re not required to file a tax return but must file Form 8606, sign and mail it to the IRS where you would file a 1040/1040‑NR.
• Failure to file Form 8606 in a distribution year can cause tax and possibly penalties on amounts that should be tax‑free.

Who must file

File Form 8606 if any of the following apply:
* You made nondeductible (after‑tax) contributions to a traditional IRA.
* You converted any traditional or SEP IRA to a Roth IRA (a conversion).
* You received an IRA distribution and some or all of it is attributable to prior nondeductible contributions.
* Your total basis in IRAs is greater than zero and you need to determine the taxable and nontaxable portions of distributions.

Why Form 8606 matters

Form 8606 documents your after‑tax basis in IRAs so the IRS can correctly tax distributions and conversions. Without it, nontaxable portions of withdrawals or conversions may be treated as fully taxable, potentially triggering unnecessary income tax and penalties. The form is also used to apply the pro rata rule when distributions include both pre‑tax and after‑tax dollars.

Conversions and recharacterizations

• Converting traditional or SEP IRA assets to a Roth IRA generally requires reporting on Form 8606; converted amounts may be taxable to the extent they represent pre‑tax funds.
• If you later change the tax treatment of a contribution (for example, switching between deductible and nondeductible), you can generally amend your return within the time limit for filing Form 1040‑X to reflect the change.

How to file

• Attach Form 8606 to your Form 1040 or 1040‑NR and file by the return due date (including extensions).
• If you are not otherwise required to file a return but must file Form 8606, sign and mail it to the IRS at the address you would use for a 1040/1040‑NR.
• Keep copies of filed Forms 8606 to document your IRA basis for future years.

Consequences of not filing

Failing to file Form 8606 when required can result in:
* Taxation of amounts that should be tax‑free.
* Possible penalties for failing to file correct information.

Practical takeaway

Track and report any nondeductible IRA contributions promptly using Form 8606. Proper filing preserves your after‑tax basis, avoids unnecessary taxation on distributions or conversions, and ensures compliance with IRS rules.

Sources

• IRS, Instructions for Form 8606
• IRS, IRA Frequently Asked Questions
• IRS, About Form 1040‑X (Amended U.S. Individual Income Tax Return)