due_logo
Search
Close this search box.

Table of Contents

Form 8606

Definition

Form 8606 is a tax form in the U.S. that is used by taxpayers to report nondeductible contributions to their Individual Retirement Arrangements (IRAs). The form is also used to report distributions from any previous IRAs and conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs. It ensures that the IRS appropriately taxes IRA distributions.

Phonetic

The phonetic pronunciation of “Form 8606” is: “form eight six zero six.”

Key Takeaways

<ol><li>Form 8606 is a tax form used by taxpayers in the United States. It is filed with the Internal Revenue Service for any year that a non-deductible contribution is made to a Traditional IRA or if a distribution is taken from a Roth or Traditional IRA that has non-deductible contributions.</li><li>The form requires details about the contributions made during the tax year, any distributions or conversions from traditional, SEP, or SIMPLE IRAs and the amount of non-deductible contributions made in previous years. The form helps determine the portion of the distribution that is tax-free.</li><li>Filing Form 8606 accurately is important to avoid double taxation on distributions. In cases where taxpayers do not file Form 8606, when they should, the IRS may charge a $50 penalty.</li></ol>

Importance

Form 8606, issued by the Internal Revenue Service (IRS), is an essential tax document used by individuals in the United States to report non-deductible contributions to their Individual Retirement Accounts (IRA). It allows taxpayers to track and report their after-tax contributions to keep them from being doubly taxed when withdrawn. Furthermore, it helps maintain a record of the accumulation of non-deductible contributions over the years and is necessary when distributing non-taxable amounts from the specific types of IRAs. Hence, Form 8606 plays a critical role in ensuring the accurate management of retirement contributions and distributions, facilitating appropriate taxation.

Explanation

Form 8606 is a tax form used by taxpayers in the United States to report specific types of income and after-tax contributions. The form serves the purpose of documenting nondeductible contributions made to traditional Individual Retirement Accounts (IRAs). By means of Form 8606, the Internal Revenue Service (IRS) is able to ascertain the amount of tax due once funds are withdrawn. The form ensures that taxpayers only pay tax on the earnings portion of their non-deductible IRA contributions, thereby preventing double taxation.In addition to reporting nondeductible contributions to traditional IRAs, Form 8606 is also used to record distributions from Roth IRAs, conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs, and withdrawals from education accounts. By diligently documenting these figures on Form 8606, taxpayers essentially provide the IRS with an accurate report of their taxable and non-taxable incomes, which in turn allows the IRS to evaluate whether the taxpayers’ contributions fall within the permissible maximum limits.

Examples

Form 8606 is used by the Internal Revenue Service (IRS) in the United States to track non-deductible contributions to Traditional Individual Retirement Accounts (IRAs) or contributions to Roth IRAs. Here are three real-world examples of when Form 8606 would be used:1. John decides to contribute to his Traditional IRA. However, because his income level is too high, he can’t deduct this contribution on his taxes. In this case, John would need to complete Form 8606 when filing his tax return to let the IRS know about his non-deductible contribution to his Traditional IRA.2. Lisa has a Roth IRA, and has chosen to make contributions to this account. Even though the contributions to a Roth IRA are not tax-deductible, Lisa would still need to record these contributions using Form 8606 when filing her taxes. This way, when she withdraws the money at retirement, the IRS will know how much of those funds have already had taxes paid on them.3. Robert is converting his Traditional IRA to a Roth IRA, which is a taxable event. He would need to report this on Form 8606 to calculate the taxable portion of the converted funds. The taxable amount would be the portion of the distributed funds from the Traditional IRA that were originally deducted.

Frequently Asked Questions(FAQ)

What is Form 8606?

Form 8606 is a tax form used by individuals who have made non-deductible contributions to an Individual Retirement Account (IRA). This form is used to report these contributions, as well as any distributions and conversions to the IRS.

Who requires to file Form 8606?

Individuals who have made non-deductible contributions to their IRA need to file Form 8606. This includes contributions to a traditional IRA, Roth IRA or a SIMPLE IRA. Also, this form is mandatory if you have converted your traditional, SEP, or SIMPLE IRA to a Roth IRA.

What is the purpose of Form 8606?

The purpose of Form 8606 is to track any basis the taxpayer has in their IRAs. It ensures that when distributions are taken, the taxpayer doesn’t pay tax again on contribution amounts that were already taxed.

How to file Form 8606?

Form 8606 can be filed by filling out the form and attaching it to your yearly tax return. You can download the form directly from the IRS website.

When do I need to file Form 8606?

You should file Form 8606 with your tax return each year you make non-deductible contributions to your IRA, or if you convert any IRA into a Roth IRA, or take distributions from your IRA.

What happens if I do not file Form 8606?

If you do not file form 8606, any non-deductible contribution that you make will be considered as a deductible contribution by the IRS. This could result in owing taxes on the contribution amount, which you previously paid.

What type of information is required to fill Form 8606?

Form 8606 will typically require your basic information, such as your name, Social Security number, non-deductible contributions made in the taxable year and to report any distributions you’ve received from any of your traditional, SEP, or SIMPLE IRAs.

Related Finance Terms

  • Nondeductible IRAs
  • Form 1040 (U.S. Individual Income Tax Return)
  • Tax Deductions
  • Retirement Savings Contributions
  • Internal Revenue Service (IRS)

Sources for More Information

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More