Form 8606: who must file it and how IRA basis is tracked

Form 8606, Nondeductible IRAs, is the IRS form that keeps track of money in your IRAs that has already been taxed. You file it with your federal return for any year in which you make a nondeductible traditional IRA contribution, convert to a Roth IRA, take a traditional IRA distribution while you have after-tax basis, or take certain Roth IRA distributions. Its job is to work out how much of a distribution or conversion is taxable and how much is a return of money you have already paid tax on.

The form matters because nobody else keeps this record for you. Your IRA custodian reports contributions and distributions, but it does not know whether you deducted a contribution. If the basis is not recorded on Form 8606, the default result is that every dollar coming out of a traditional IRA is treated as taxable. This guide follows the IRS Instructions for Form 8606; forms are revised each year, so use the instructions for the tax year you are filing. This is general education, not tax advice.

What Form 8606 is for

Contributions to a traditional IRA are either deductible or nondeductible. Whether you can deduct depends on your income and on whether you or your spouse is covered by a workplace retirement plan, under limits the IRS adjusts each year. A contribution you cannot or do not deduct is made with after-tax money. That amount is your basis.

Basis should come out tax-free, because it was taxed on the way in. Earnings and deductible contributions are taxed on the way out. Form 8606 is the ledger that separates the two, year after year, and carries the running basis total forward until the accounts are empty.

The same form also reports Roth conversions and works out the taxable part of Roth IRA distributions that are not qualified.

Who must file Form 8606

According to the IRS instructions, you file the form for a year in which any of the following apply:

• You made a nondeductible contribution to a traditional IRA for that year.
• You took a distribution from a traditional, SEP or SIMPLE IRA and your basis in those IRAs is more than zero.
• You converted any amount from a traditional, SEP or SIMPLE IRA to a Roth IRA.
• You took a distribution from a Roth IRA, other than a rollover, a recharacterization or a return of certain contributions.
• You took a distribution from an inherited traditional IRA that has basis, or a distribution from an inherited Roth IRA that was not qualified.
• You or your spouse transferred all or part of a traditional IRA to the other under a divorce or separation agreement and the transfer changed the basis in either IRA.

Each person files their own form. A married couple filing jointly who both have reportable activity attach two Forms 8606, one for each spouse, because IRAs are individual accounts and basis is tracked per person.

When you do not need to file

The form is not required every year you own an IRA. You generally do not file it if:

• You have never made a nondeductible contribution and have no basis. Ordinary traditional IRA distributions then go straight on your Form 1040.
• Your only activity was a regular contribution to a Roth IRA. Roth contributions are not reported on Form 8606, though you should keep your own record of them.
• Your only movement was a direct rollover or trustee-to-trustee transfer between accounts of the same type.

There is a practical consequence. Years can pass between the form that recorded your basis and the year you next need it. The most recent Form 8606 you filed is the document that proves your basis, so keep it.

What the three parts of the form do

Part	What it covers	When you complete it
Part I	Nondeductible contributions, traditional IRA distributions and basis	You made a nondeductible contribution, or took a distribution or converted while holding basis
Part II	Conversions from traditional, SEP or SIMPLE IRAs to Roth IRAs	You converted any amount during the year
Part III	Distributions from Roth IRAs	You took a Roth IRA distribution that has to be tested for tax

Part I adds this year's nondeductible contribution to basis carried forward from earlier years, then applies a ratio to anything that came out. Part II takes the amount converted and, using the Part I result, splits it into taxable and non-taxable pieces. Part III applies the Roth ordering rules: distributions are treated as coming first from regular contributions, then from converted amounts, and last from earnings. A qualified distribution is tax-free in full; the tests are covered in the guide to the Roth IRA 5-year rule.

How the basis calculation works: an illustrative example

You cannot choose to withdraw or convert only your after-tax dollars. Part I treats all of your traditional, SEP and SIMPLE IRAs as one pool and assigns basis proportionally. This is the pro rata rule.

Assume, for illustration only:

• basis carried forward from earlier nondeductible contributions: $12,000
• amount converted to a Roth IRA during the year: $20,000
• total value of all traditional, SEP and SIMPLE IRAs on December 31, after the conversion: $80,000

Step	Calculation	Result
Total pool	$80,000 year-end value + $20,000 converted	$100,000
Basis ratio	$12,000 ÷ $100,000	12%
Non-taxable part of the conversion	$20,000 × 12%	$2,400
Taxable part of the conversion	$20,000 − $2,400	$17,600
Basis carried to next year	$12,000 − $2,400	$9,600

The $17,600 is added to taxable income for the year. The remaining $9,600 of basis is not lost. It goes on next year's form as the opening figure. These numbers are assumptions chosen to show the arithmetic, and the actual form has more lines, including adjustments for contributions made between January 1 and the filing deadline. To see how a conversion of a given size might affect your tax, the Roth conversion calculator gives an illustrative estimate. Verify the figures against the current form before filing.

Note which balances count. The year-end value includes every traditional, SEP and SIMPLE IRA you own, wherever it is held. It does not include 401(k) or other employer plan balances, and it does not include your spouse's IRAs.

Form 8606 and the backdoor Roth

The backdoor Roth IRA is a nondeductible traditional IRA contribution followed by a conversion, so it produces a Form 8606 with both Part I and Part II completed. If you have no other pre-tax IRA money at year end, almost all of the conversion is a return of basis and little or none of it is taxable. If you hold other pre-tax IRA balances on December 31, the ratio above pulls taxable money into the conversion.

A common filing error is to make the contribution for one tax year and convert in the next, then leave Part I off the first year's return. The contribution year needs a Form 8606 recording the basis, and the conversion year needs one reporting the conversion.

Penalties and the larger cost of not filing

The IRS instructions set out two penalties, each waived if you can show reasonable cause:

• $50 for failing to file Form 8606 to report a nondeductible contribution when required.
• $100 for overstating your nondeductible contributions.

The penalty is the minor exposure. The real cost of a missing form is double taxation. Without a record of basis, a later distribution or conversion is taxed in full, which means paying tax a second time on money that was taxed when you earned it. Over many years of nondeductible contributions, that can be a material sum.

Filing late, amending and filing on its own

If you are not required to file a tax return but must file Form 8606, the instructions say to sign and date the form and send it to the IRS at the same address you would use for Form 1040, with your address completed.

If you missed the form in an earlier year, the usual remedy is to file the Form 8606 for that year so the basis is on record. Depending on the circumstances this may be sent on its own or with an amended return on Form 1040-X, and later years' forms may then need correcting so the carry-forward is right. A tax professional can advise on the cleanest way to do this and on requesting relief from the penalty for reasonable cause.

If you change your mind about a deduction, the instructions allow you to switch a contribution from nondeductible to deductible, or the reverse, within the normal time limit for amending a return, by filing Form 1040-X with a new Form 8606.

A contribution that was moved between IRA types is a different matter. An IRA recharacterization or a returned contribution has to be explained in a statement attached to the return.

Records to keep and for how long

The IRS instructions say to keep the following until all distributions from your IRAs have been made:

• page 1 of each Form 1040 or 1040-SR for any year you made a nondeductible contribution
• every Form 8606 you have filed, with its statements and worksheets
• Forms 5498 showing contributions and year-end IRA values
• Forms 1099-R for each year you received a distribution

That can mean decades, well beyond the usual retention period for tax returns. Basis also survives you. A beneficiary who inherits a traditional IRA with basis can recover it tax-free, but only if they can establish the figure, and the IRS requires a separate Form 8606 for an inherited IRA instead of combining it with the beneficiary's own. The rules for heirs are covered in the guide to the inherited IRA and in IRS Publication 590-B.

Frequently asked questions

Do I need to file Form 8606 every year?

No. You file it only for years with a triggering event, such as a nondeductible contribution, a Roth conversion, a traditional IRA distribution while you have basis, or a Roth IRA distribution that must be tested. In other years, keep your last filed form as your basis record.

What happens if I never filed Form 8606 for nondeductible contributions?

The IRS has no record of your basis, so withdrawals may be taxed in full. The usual fix is to file the missing forms for the years concerned. There is a $50 penalty per missed form, which the IRS can waive for reasonable cause. A tax professional can help reconstruct the figures from old returns and Forms 5498.

Does a Roth IRA contribution go on Form 8606?

No. Regular Roth IRA contributions are not reported on the form. Roth conversions are reported in Part II, and Roth distributions that need testing are reported in Part III. Keep your own running total of Roth contributions, because you will need it when you take distributions.

Do spouses file one Form 8606 or two?

Two, if both have reportable activity. IRA basis belongs to the individual account owner, so each spouse completes a separate form and both are attached to the joint return.