Form 8606 is a tax form used by individuals in the United States to report non-deductible contributions to their Traditional IRAs. When individuals make contributions to a Traditional IRA, they can sometimes take a tax deduction for that contribution, depending on their income level and whether they or their spouse are covered by a retirement plan at work. However, if they don’t qualify for the deduction, the contribution is considered non-deductible.
The purpose of Form 8606 is to track these non-deductible contributions over the years. This is important because it helps to determine the taxable portion of any distributions or withdrawals the individual takes from their IRAs in the future. Without this form, it would be assumed that the entire amount of the withdrawal is taxable, which would not be accurate if part of the IRA consisted of non-deductible contributions.
In addition to reporting non-deductible contributions, Form 8606 is also used to:
- Report distributions from Roth IRAs.
- Report conversions from Traditional, SEP, or SIMPLE IRAs to Roth IRAs.
- Report distributions from IRA accounts with basis due to non-deductible contributions.
Properly filing Form 8606 ensures that individuals do not pay tax twice on the same dollars—first when they contribute them and again when they withdraw them. It is a critical part of tax planning and reporting for those who are investing in IRAs as part of their retirement strategy.