Nondeductible IRAs and Roth Conversions

Who Files Form 8606

Anyone making nondeductible traditional IRA contributions (typically due to income limits on deductibility), executing Roth conversions, or taking distributions from a traditional IRA with a basis. Required for backdoor Roth strategy users to track basis across years.

What Form 8606 Reports

Part I tracks nondeductible contributions and basis. Part II reports Roth conversions and the taxable portion under the pro-rata rule. Part III reports distributions from a traditional IRA where basis exists. Failing to file Form 8606 in a year of nondeductible contribution loses the basis and converts later distributions back into fully taxable. The IRS allows late filing of missed Form 8606s with a $50 penalty per year, often waived for reasonable cause.

Key Deadlines

• Filed with Form 1040 by April 15 each year
• Missing years can be filed late with reasonable-cause penalty waiver

Common Mistakes

• Skipping Form 8606 in a backdoor Roth year and losing basis tracking
• Forgetting the pro-rata rule when other pre-tax IRA balances exist (SEP, SIMPLE, traditional)
• Confusing Form 8606 (IRA basis) with Form 5498 (custodian-issued contribution report)
• Filing Form 8606 in a year when no nondeductible contribution or conversion occurred

Best Practices

• File Form 8606 EVERY year you make a nondeductible IRA contribution, even if you do not convert. Skipping a year loses the basis tracking.
• For backdoor Roth strategy, watch the pro-rata rule against ALL pre-tax IRA balances (Traditional, SEP, SIMPLE). Roll pre-tax IRAs into a 401(k) BEFORE converting to clean the math.
• File missing prior-year Form 8606s late under the reasonable cause framework. The $50 per year penalty is routinely waived.
• Reconcile Form 8606 against Form 5498 (custodian-issued contribution report). Discrepancies usually mean a missed nondeductible contribution.
• For Roth conversions, time them in low-income years (pre-Social Security retirement, sabbatical, business loss year) to maximize after-tax efficiency.

Source: Official Form 8606 information at IRS.gov