The United States Internal Revenue Service (IRS) requires taxpayers to file Form 8606 to report transactions within IRAs. If you have an IRA and have made nondeductible contributions, you will likely have to file Form 8606 — if not this year, sometime in the future.
Individual retirement accounts (IRAs) make up the largest portion of retirement assets in the United States. They are popular for their tax and investing benefits. Taxpayers use Form 8606 to report nondeductible contribution, conversion, or distribution activity in IRAs.
The Internal Revenue Service (IRS) specifies conditions that warrant filing Form 8606. A tax professional will help you identify which conditions may apply to you. This article will help you understand the basics of IRS Form 8606.
What is Form 8606?
Form 8606 is the tax form distributed by the Internal Revenue Service (IRS). If you contribute after-tax amounts to an Individual Retirement Account (IRA) there is a good chance you will be required to file this form. While tax laws can change from one year to the next, the rules governing who should file Form 8606 for the 2022 tax probably won’t differ radically from those for 2021, though time will tell. And if you think you made a mistake on your 2021 taxes and will need to file an amended return, you’ll want to know the 2021 rules.
Must you file Form 8606?
According to the IRS, you are required to file this form for the 2021 tax year if…
- You made nondeductible contributions to a traditional IRA for 2021, including a repayment of a qualified disaster or reservist distribution.
- You received distributions from a traditional, SEP, or SIMPLE IRA in 2021 and your basis in these IRAs is more than zero.
- You or your spouse transferred all or part of a traditional, SEP, or SIMPLE IRA in 2021 to the other spouse under a divorce or separation agreement where the transfer resulted in a change in the basis of the IRA of either spouse.
- You converted an amount from a traditional, SEP, or SIMPLE IRA to a Roth IRA in 2021.
- You received distributions from a Roth IRA in 2021 (other than a rollover, recharacterization, or return of certain contributions).
- You received a distribution from an inherited traditional, SEP, or SIMPLE IRA that has a basis, or you received a distribution from an inherited Roth IRA that wasn’t a qualified distribution. You may need to file more than one Form 8606.
All taxpayers who do at least one of these things will need to file Form 8606 with their taxes. If you were required but failed to do so when filing your 2021 taxes, you may need to file an amended return.
When to file IRS Form 8606
There are several instances for which the IRS requires taxpayers to submit Form 8606. The IRS website indicates that taxpayers must report the following tax events using Form 8606. If you participated in any of the above-listed transactions, you will most likely file Form 8606 when you do your taxes for the year.
A tax professional can help assess if your IRA contributions, conversions, or distributions fall under IRS Form 8606. If you have any questions as to whether you fall under any of these categories, reach out to a professional tax advisor.
Nondeductible contributions you made to traditional IRAs
A traditional IRA is a retirement account other than a SEP, SIMPLE, or Roth IRA. Contributors can make deductible, partially deductible, or nondeductible contributions up to the IRS contribution limit. Deductibility depends upon how a contributor chooses to pay taxes the contribution.
A nondeductible contribution is another way of saying that an individual chose to contribute after-tax amounts. After-tax assets are nondeductible. If you make nondeductible IRA contributions, you must file Form 8606.
Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs
A Savings Incentive Match Plan for Employees (SIMPLE) is a traditional retirement account that a small employer sets up for an employee. With a SIMPLE IRA, both the employee and employer make contributions to the retirement plan.
A Simplified Employee Pension (SEP) IRA is another type of traditional IRA that an employer can set up for an employee. Usually, only the employer makes contributions to the retirement plan. SEP IRA contributions can be deductible or non-deductible.
A Roth IRA is a type of retirement account that is only available to individuals or married couples who meet income requirements. It is similar to a traditional IRA, but with a few exceptions.
Roth IRA conversions are commonly made for tax benefits and consolidation of assets. If you convert a traditional, SIMPLE, or SEP IRA to a Roth IRA, you must report it to the IRS on Form 8606.
Distributions from traditional, SEP, or SIMPLE IRAs
Distribution is another term for withdrawing IRA money. One can distribute after-tax IRA funds in any of the following four cases tax-free and penalty-free. You may also withdraw money from an IRA outside of these circumstances, but you may be subject to a penalty or tax payment.
Qualified distributions from your IRA |
Any distributions that don’t fit within the four scenarios listed here may be considered nonqualified distributions. There are several special cases such as disaster relief and adoption in which a distribution is qualified. Work with a trusted tax professional to determine how to report your IRA distributions.
Many choose to make after-tax contributions so that they avoid paying income tax when they withdraw. If you have ever made nondeductible contributions to an IRA, you must report distributions from said IRA on Form 8606.
Distributions from Roth IRAs
Since contributions to Roth IRAs are nondeductible, you are required to report distributions from Roth IRAs on Form 8606.
Roth IRAs and traditional IRAs are similar but have a few key differences. Contributions to Roth IRAs are never deductible. There are no minimum distribution requirements. Qualified distributions from Roth IRAs are not included in income. Therefore, you generally don’t have to pay income tax on distributions from Roth IRAs.
The Internal Revenue Service asks that you report any Roth IRA distribution using Form 8606.
How to file Form 8606
The IRS provides instructions on how to file Form 8606. There are plenty of nuances to this process, so consulting a tax professional could be well worth the expense.
Information that you will need to provide on Form 8606:
|
Complete the two-page tax return form to the best of your ability using this information. The surest way to make sure you don’t make costly mistakes is to have a professional tax advisor review your form during or after its completion.
Once you’ve completed the form (and, if possible, had it reviewed by a pro), submit it to the IRS along with all of your other applicable tax forms by the tax year’s deadline, usually April 15. If there are any issues with the form, the IRS will contact you directly via mail or email.
If you do receive an IRS letter or notice, don’t worry. Read this article by SuperMoney and consult your tax advisor to guide your next steps.
Other relevant tax forms
If you are required to file Form 8606, there is a chance you will be required to file other specific tax forms as well. Here are a few forms that you may have to file:
- Form 8862, Information to Claim Certain Credits After Disallowance
- Form 5498, IRA Contribution Information
- Form 1099-C, Cancellation of Debt
- Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business
- Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan
- Form 4797, Sales of Business Property
Importance of tax consultants
Chances are you aren’t an expert on the Internal Revenue Code, the tax code of the United States. Hiring someone who is, such as a Certified Public Accountant or another professional tax advisor, can save you a lot of time, free you from a great deal of stress, and possibly save you money.
Tax forms such as Form 8606 come with special rules, which can get complicated. If you miss something on your taxes, you may be subject to fines and other consequences. A tax professional can mitigate this risk.
Key takeaways
- You can choose to contribute after-tax amounts to your individual retirement account (IRA). The benefit of doing this is that you may avoid paying income taxes upon withdrawal.
- The Internal Revenue Service (IRS) requires IRA owners to file Form 8606 if they make nondeductible contributions, distribute nondeductible IRA assets, or convert IRA accounts. The types of IRAs that Form 8606 may apply to include Roth, traditional, SEP IRA, and SIMPLE IRAs.
- If you participated in any nondeductible IRA-related transactions this tax year, you will probably have to file Form 8606. It may be helpful for you to consult a tax professional to guide you through this tax form and any others.
FAQ
What is the purpose of IRS form 8606?
The purpose of Form 8606 is to notify the IRS of various transactions within retirement accounts.
Who must file form 8606?
Taxpayers must file Form 8606 to report any of the following transactions:
- Nondeductible contributions you made to traditional IRAs
- Distributions from traditional, SIMPLE, or SEP IRAs, if you have ever made nondeductible contributions to traditional IRAs
- Conversions from traditional, SIMPLE, or SEP IRAs to Roth IRAs
- Distributions from a Roth IRA
What happens if you don’t file form 8606?
If you don’t file Form 8606 when you should, you will most likely incur a penalty fee of at least $50.
Do I need to file 8606 for a Roth?
You do need to file Form 8606 for Roth IRA conversions or distributions.
Continue your tax-learning journey
Taxes are complicated and, if history is any indicator, will continue to grow in complexity going forward. Dealing with this complexity could scare anyone. But you can face your next tax season with less fear and more confidence using SuperMoney’s guide to tax planning for beginners.
View Article Sources
- 26 USC 408: Individual retirement accounts — U.S. House of Representatives, Office of the Law Revision Counsel
- About Form 4797, Sales of Business Property — IRS
- About Form 8606, Nondeductible IRAs — IRS
- Background reading from Intuit TurboTax and from personal finance and wealth management sites — Various
- Form 8606, Nondeductible IRAs — IRS
- Individual Retirement Accounts (IRAs) — U.S. Securities and Exchange Commission
- Instructions for Form 8606 — IRS
- Internal Revenue Code — IRS
- Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs) — IRS
- Ten Important Facts About IRAs — Investment Company Institute
- IRS Form 1099-C: How to Avoid Taxes on Forgiven or Canceled Debt — SuperMoney
- IRS Form 8300 – The Definitive Guide — SuperMoney
- IRS Letters and Notices: What To Do If You Got One — SuperMoney
- What Is An 8862 Tax Form? — SuperMoney
- What is Form 3922? Transfer of Stock Explained — SuperMoney
- What is IRS Form 5498? — SuperMoney
- What Is Tax Planning? A Guide For Beginners — SuperMoney
