Contributed by: Henry, FreeTaxUSA Agent, Tax Pro and KristineS, FreeTaxUSA Agent, Tax Pro
After-tax (nondeductible) contributions to your traditional IRAs are tracked and reported on Form 8606. These contributions give you basis in your IRAs. Keeping accurate records of your basis is important because when you take distributions later, you’ll want to distinguish between the taxable and nontaxable portions of the distribution. This will keep you from paying income tax twice on the same funds.
Do you need to file Form 8606?
According to the IRS instructions, one of the situations where Form 8606 is necessary is if you made nondeductible contributions to a traditional IRA for the year. The IRS assesses a $50 penalty if you are required to file Form 8606 but don’t do so.
Information about IRA contributions can be entered in the software by following this menu path: Deductions/Credits > Common Deductions/Credits > IRA Contributions. Form 8606 will generate automatically (if applicable) based on your entries.
*Please note for tax years 2023 and prior, our software does NOT support reporting nondeductible traditional IRA contributions if you meet the qualifications to claim an IRA deduction. However, starting with tax year 2024 you will be able to choose to either take the deduction or make the contribution nondeductible.
What if you missed reporting nondeductible contributions in a prior year?
Did you forget to file Form 8606 in a prior year? Check out how this question was answered in our Community. To correct this, fill out Form 8606 and send it to the IRS with a copy of your original tax return for the year the contribution was made. You generally wouldn’t need to file an amended tax return for that year unless you took a distribution from the IRA.
To generate Form 8606 in our software, you have a couple options:
- Create a new account and re-enter your prior year information (including your nondeductible contributions) in our prior year software to get Form 8606 for the appropriate tax year.
OR
- Start an amended prior year return in your existing account to add your nondeductible contributions and get Form 8606.
With either option, you’ll want to set the return to be mailed as you finalize the filing process so you can print the form you need without actually filing the return.
If you missed reporting nondeductible contributions for multiple prior years, you'll need to start with the furthest back prior year return since IRA contribution information is collected and maintained by the IRS for reporting purposes.
Filing instructions
When you send Form 8606 with a copy of your prior year return to the IRS, it’s a good idea to include a copy of your prior year Form 5498 showing your contribution amounts. Also, send a short letter of explanation. Be concise and make it easy for the IRS examiner reviewing your documents to understand the timeline of events.
If you are filing Form 8606 for multiple prior years, mail the information for each year in a separate envelope; do not combine them. It’s a good idea to:
- Send your filing via certified mail or an overnight service to make sure you have proof of receipt.
- Keep a copy of everything you send to the IRS in case it's needed for future reference.
It generally takes the IRS around six months to process mailed returns, so be prepared to wait for your IRS account to be updated with the new information.
