Taxpayers use Form 8606 to report a number of transactions relating to what the Internal Revenue Service (IRS) calls "Individual Retirement Arrangements" and what most people just call IRAs. These are accounts that provide tax incentives to save and invest money for retirement.
IRAs come in several variations:
- With a traditional IRA, you may be able to take a tax deduction for the money you put into the account. Earnings in the account are untaxed. When you withdraw money, you pay income taxes on the earnings and on any contributions that you took a deduction for.
- With a Roth IRA, you get no tax deduction for money you put in, but your earnings are still untaxed, and you generally don’t pay taxes on distributions of what you put in nor on the earnings.
- A Simplified Employee Pension, or SEP-IRA, is a traditional IRA set up for an employee by an employer. The employer contributes money to it.
- A SIMPLE IRA is a traditional IRA set up by an employer, with both the employer and employee contributing money.
Traditional IRAs and deductibility
Generally speaking, in 2023 taxpayers can deduct up to $6,500 per year for money they contribute to a traditional IRA, or $7,500 if they’re age 50 or older. However, if you are eligible to participate in a retirement plan through your employer, such as a pension or a 401K, then your deduction may be limited or disallowed, depending on your income.
As of 2023, if you have a retirement plan at work, you can take only a partial deduction if your income exceeds:
- $73,000 if you're single
- $116,000 if you're married and filing a joint return
You can’t take any deduction for IRA contributions if you have a retirement plan at work and your income is more than:
- $83,000 if you're single
- $139,000 if married filing jointly
Note that you can still contribute money to an IRA in these situations, and your earnings will still grow tax-free. All that’s affected is how much you can deduct in the current year.
Form 8606 for nondeductible contributions
Any money you contribute to a traditional IRA that you do not deduct on your tax return is a “nondeductible contribution.” You still must report these contributions on your return, and you use Form 8606 to do so.
Reporting them saves you money down the road. That’s because no individual’s money is supposed to be subject to federal income tax twice. Form 8606 gets it “on the record” that a portion of the money in your IRA has already been taxed. Later on, when you take distributions, a portion of the money you get back will not be subject to income tax.
Other uses for IRS Form 8606
The form is not just for reporting nondeductible contributions to traditional IRAs. You also use it to report other IRA-related transactions where the government needs to track the status of your money—whether it’s been taxed or untaxed. Form 8606 is also used when you:
- Take distributions from a Roth IRA
- Take distributions from a traditional, SEP or SIMPLE IRA at any time after you have made nondeductible IRA contributions
- Convert a traditional, SEP or SIMPLE IRA into a Roth IRA
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