Instructions for Filling Out IRS Form 8606

IRS Form 8606, Nondeductible IRAs, is a document used to report specific transactions related to your Individual Retirement Arrangements (IRAs). Its primary function is to track your “basis,” which refers to the money you contributed to an IRA that you’ve already paid income tax on, known as nondeductible contributions. This tracking prevents you from being taxed a second time on that money when you eventually take distributions.

The form serves as a formal record detailing the after-tax amounts within your traditional, SEP, or SIMPLE IRAs. It is also used to report conversions of these traditional-style IRAs to Roth IRAs and to determine the taxable amount of any distributions you might take. Properly filing this form ensures that the nontaxable portion of your IRA funds is accurately calculated, which impacts your overall tax liability.

Who Must File Form 8606

A requirement to file Form 8606 is triggered by specific actions related to your IRAs within a tax year. You must file the form if you made nondeductible contributions to a traditional IRA. This occurs when your income is too high to qualify for a tax deduction for your contributions. Filing is also necessary if you took distributions from a traditional, SEP, or SIMPLE IRA and you have a basis in any of those IRAs from making nondeductible contributions in the current or previous years.

Another trigger for filing is converting funds from a traditional, SEP, or SIMPLE IRA into a Roth IRA. This transaction, often called a “backdoor” Roth IRA contribution, requires careful reporting to calculate any tax due on the conversion. You are also required to file if you receive a distribution from a Roth IRA.

Information Needed to Complete the Form

Before starting Form 8606, gathering specific financial documents is a necessary step. The first figure needed is your total basis in traditional IRAs from all prior years. This amount is found on line 14 of your most recently filed Form 8606. If you have never filed before, your prior-year basis is zero.

You will also need the total amount of any nondeductible contributions you made to your traditional IRAs for the current tax year. This includes contributions made up until the tax filing deadline of the following year. You must also determine the total value of all your traditional, SEP, and SIMPLE IRAs as of December 31 of the tax year, which is available on your year-end account statements.

Finally, collect any forms reporting distributions or contributions. Form 5498, IRA Contribution Information, shows the contributions you made for the year. If you took money out of an IRA or performed a conversion, you will receive Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This document details the gross amount of the distribution.

Completing Form 8606 Line by Line

Nondeductible Contributions

Part I of Form 8606 is where you report nondeductible contributions and calculate the taxable portion of any distributions from traditional, SEP, or SIMPLE IRAs. On line 1, you will enter the total nondeductible contributions made to your traditional IRAs for the tax year. Line 2 requires you to input your total basis from prior years.

The subsequent lines guide you through a calculation to determine what percentage of your IRA funds is nontaxable. Line 6 asks for the value of all your traditional, SEP, and SIMPLE IRAs at the end of the year. Line 7 requires the total of any distributions you took, and line 8 is for the amount you converted to a Roth IRA. These figures are used in a pro-rata calculation on lines 10 and 11 to determine the nontaxable portion of your distributions and conversions. The final result on line 15 shows the taxable amount of your IRA distributions, which you will carry over to your Form 1040.

Conversions

Part II addresses conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs. On line 16, you enter the net amount you converted to a Roth IRA during the year. This figure should match the amount you entered on line 8 in Part I.

Line 17 requires you to enter your basis in the amount that was converted, which comes from line 11 in Part I. The calculation on line 18 determines the taxable amount of your conversion. This taxable income must be reported on your main tax return, Form 1040.

Distributions From Roth IRAs

Part III is used to calculate the tax on distributions from a Roth IRA. Line 19 asks for the total amount of distributions you took from your Roth IRA during the year. The subsequent lines help determine if any of that distribution is taxable.

On line 22, you will enter your basis in Roth IRA contributions, which is the sum of all your direct contributions to Roth IRAs over the years. Line 24 requires you to enter your basis in conversion and rollover amounts. The form then determines if any of the distribution is attributable to earnings, which may be taxable if the distribution is not a qualified one. The final taxable amount is calculated on line 25c.

Filing and Recordkeeping Requirements

Once you have completed Form 8606, it must be filed with your annual income tax return. You should attach the form to your Form 1040, 1040-SR, or 1040-NR and submit it by the standard tax deadline, including any extensions. If you are not required to file a federal income tax return but still must file Form 8606, you must sign and mail the form to the IRS at the same address where you would have filed your tax return.

Failing to file a required Form 8606 can result in a $50 penalty unless you can show reasonable cause. Overstating your nondeductible contributions can also lead to a $100 penalty. A significant consequence is that without this form, the IRS may treat all of your IRA distributions as fully taxable, leading to a higher tax bill.

You should keep a copy of every Form 8606 you file. The IRS instructs taxpayers to retain these forms, along with copies of the first page of their Form 1040 and any Forms 5498, until all funds have been distributed from all of their IRAs. Because your basis carries over from year to year, these records are the only way to prove the nontaxable portion of your future IRA distributions.