What to do if I never filled out Form 8606 for past non-deductible IRA contributions?
Hello all! I have recently been reviewing my tax situation in preparation for potentially maxing out my IRA contribution for tax year 2024.
Looking at tax years 2019 and 2020, I received a Form 5498 for contributions I made to my Traditional IRA (never contributed for any other years). For these 2 years, I was well within the limit to deduct these contributions from my tax filings, but according to my FreeTaxUSA filed Form 1040s for 2019 and 2020, I did not enter any adjustments to income from Schedule 1, Line 22. My AGI was always just the sum of (1) my wages, (2) ordinary dividends, and (3) capital gains; both years have an income adjustment of $0.
Thus, I am guessing that the IRA contributions I made in 2019 and 2020 were considered non-deductible (even if I was eligible to deduct), but I am pretty sure I did not fill out Form 8606 to report these non-deductible traditional IRA contributions. FreeTaxUSA at least does not indicate as such, and I don't have any other records besides the 1040 that was filed, since I was unaware when I was younger that this was something to report.
Therefore, what should I do now to ensure the IRS knows that those 2 contributions were made with after-tax money and that I did not deduct them from my taxes? I don't want to get taxed again on the contributions in the future since they don't have a record that they were considered non-deductible.
Furthermore, I was considering converting my Traditional IRA account to a Roth IRA account, since (1) those contributions were (probably) non-deductible (as long as I square that away with the IRS), (2) my MAGI is above the limit for deducting IRA contributions in 2024, but (3) my MAGI is still below the Roth cutoff, thus I wanted to contribute to the Roth directly while I am eligible. After clearing up what to do in my situation with the unreported Form 8606 for 2019 and 2020, my plan is for the IRA conversion to not incur any taxes on the contributions, since I'll have verified that the contributions in the Traditional IRA are non-deductible and were already taxed.
Hope folks can help provide guidance, thanks! 😁
Best Answer
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Hi RockRaider,
Thanks for writing in with your question.
If your 2019 and 2020 tax returns don't include Form 8606, Nondeductible IRAs, that most likely means information about your IRA contributions were not entered into the FreeTaxUSA program. The software automatically creates the form based on your entries. This information is entered in the Deductions/Credits > Common Deductions/Credits > IRA Contributions.
According to the Instructions for Form 8606, the IRS assesses a $50 penalty if you are "…required to file Form 8606 to report a non-deductible contribution to a traditional IRA for 2023 but don’t do so…" and you're required to file Form 8606 if you made a contribution to your non-deductible IRA for the given years.
To correct this, you can file Form 8606 with a copy of your tax return for each year. If you've not taken any distributions from the IRA account you won't need to formally file an amended tax return. However, in order to create Form 8606, in our software you'll need to either create a new account 'as if' you're going to file a return with the form in order to be able to print if off and send it to the IRS for each year OR you can go through the amendment function in each year to create the Form 8606 to then be able to print it off and mail it in. If you choose the latter method, be sure to keep a copy of your original tax return(s) before amending them.
You'll need to start with the furtherest back prior year return since IRA contribution information builds on itself.
Here's the 2019 link to use.
Here's the 2020 link to use.
I recommend you include a copy of your Form 5498 showing your contribution amounts. Include anything else that might show these were non-deductible contributions. You can include a short letter of explanation. Stick to the facts. Make it easy for the IRS examiner reviewing your documents to understand the timeline of events. Make and keep a copy of everything you send to the IRS.
Allow plenty of time for this information to be processed in your tax account. Six months is a very realistic timeframe. Mail this information in separate envelopes. One for 2019, one for 2020. Do not combine them into one envelope. I recommend certified mail or an overnight service for each envelope to make sure you have proof of receipt.
Once this all clears up in your account history, you can make a conversion from IRA to Roth IRA much more cleanly and efficiently.
Answers
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Thank you for the response Kristine, it was quite insightful!
I filled out Form 8606 by hand for 2019 and 2020 since my situation is pretty simple. Also, I believe the software doesn't let you elect to take a non-deductible contribution if your MAGI shows you are eligible to deduct the contribution from your taxes.
Thus, for 2019, this is all I had filled out (with example amounts):
- Line 1: $500
(amount from Box 1 on Form 5498 for 2019 from my Trad. IRA issuer) - Line 2: $0
(first year making a nondeductible contribution, so no basis) - Line 3: $500
(the sum of Lines 1 & 2) - Line 14: $500
(in 2019 I did not take any distributions or do a Roth IRA conversion, so the Line 3 amount goes here and Section 1 is complete, and similarly for Section 2 and Section 3)
And then for 2020, this is all I had filled out:
- Line 1: $150
(amount from Box 1 on Form 5498 for 2020 from my Trad. IRA issuer) - Line 2: $500
(amount from Line 14 on Form 8606 from 2019, per the form's instructions) - Line 3: $650
(the sum of Lines 1 & 2) - Line 14: $650
(in 2020 I did not take any distributions or do a Roth IRA conversion, so the Line 3 amount goes here and Section 1 is complete, and similarly for Section 2 and Section 3)
If this is correct, my new questions are such:
- When I send my info for each year (2019, 2020) to the IRS with certified mail, what should I include in the envelope?
- Form 5498, to show the contribution amount to my Trad. IRA?
- Form 8606, to show this is a nondeductible contribution to my Trad. IRA?
- Form 1040, to show that I did not make any adjustments to my income when this was filed years ago and that my contributions are indeed counted as nondeductible.
- A short letter explaining the facts of the situation, why I am filing Form 8606 late, and the purpose of the included documents?
- How will I know that this information is processed in my tax account before I convert my Trad. IRA to a Roth IRA?
Thanks again for your help so far, hoping to get this clarified so I can send these documents to the IRS.
- Line 1: $500