Define Form 8606
Use IRS Form 8606, “Nondeductible IRAs,” for nondeductible contributions to an individual retirement account (IRA). To report nondeductible gifts, prepare a new form for each tax year.
IRA contributions are often tax-deductible from regular income. However, those who participate in an employment retirement plan and whose households are above a MAGI level may not be eligible to make these deductible contributions. However, they can still contribute to an IRA.
Who can file 8606 nondeductible IRAs?
Participants should file Form 8606 with their income tax forms (1040 or 1040NR). Suppose an IRA has assets with a cost basis greater than zero (post- and pre-tax contributions or deductible and nondeductible contributions). In that case, taxpayers should use Form 8606 to figure out which distributions are taxable and which are not.
Income taxes and penalties may apply if the person fails to file IRS Form 8606 in a distribution year. Taxable money was formerly tax-free.
Reclassifying an IRA
We recommend “recharacterizing” conventional and SEP IRA assets into Roth assets for younger individuals. Reclassified investments are immediately taxable as regular income; traditional and SEP IRA funds are generally tax-free. Taxes apply to conventional and SEP IRA withdrawals. Exiting the account does not tax previously taxed funds.
Future payouts may be tax-free, outweighing the current tax expense from the re-characterization. Before recharacterizing, investors should consult a tax specialist.
Taxpayers must submit Form 8606 when converting regular or SEP IRAs to Roth IRAs or receiving IRA distributions from nondeductible contributions.
Filing Nondeductible IRAs, Form 8606
File Form 8606 with Form 1040 or 1040NR by the due date, including extensions. Suppose you must file Form 8606 but not an income tax return; sign and submit it to the IRS at the same time and location as a 1040 or 1040NR.
A taxpayer can alter a nondeductible traditional IRA contribution to a deductible one within the time restriction for submitting Form 1040X, “Amended U.S. Individual Income Tax Return.”
Conclusion
- IRA nondeductible contributors utilize IRS Form 8606.
- Taxpayers holding IRA assets with a cost basis exceeding zero should prorate taxable and nontaxable distributions using Form 8606.
- File Form 8606 with Form 1040 or 1040NR by the due date, including extensions.
- In a distribution year, taxpayers who fail to complete Form 8606 may pay income taxes and penalties on tax-free funds.
