What is Form 8606?

Form 8606 is an Internal Revenue Service tax form. It is used by taxpayers to detail any non-deductible contributions to an independent retirement account, or IRA. There are several other circumstances when Form 8606 is listed.

An IRA is a scheme by which US citizens can save money towards their retirement. It is the US equivalent of what is more commonly known in other countries as a private pension scheme. In some situations, the person's contributions — money paid into the IRA — are tax deductible. This is designed to make it more attractive to save for retirement.

Whether a contribution is deductible depends on a somewhat complex set of criteria. This takes into account the marital status of the taxpayer, whether they are making a single or joint filing, whether their employer is also contributing to the IRA, and their income. Depending on the combination of factors, they may be allowed a full or partial deduction of the contribution, or it may be declared entirely non-deductible.

When contributions are non-deductible, they must be listed on Form 8606. This might not seem to be important as the person will not need to pay tax on these contributions. It is important, though, because if non-deductible contributions are made, the person may then be exempted from paying tax on the relevant share of the payments they later receive from the IRA, which are known as distributions. If Form 8606 is not filed, the contributions will be later treated as if they were deductible, meaning the person winds up paying tax both on the income they use to pay the contributions and on the distributions they receive from the IRA.

Form 8606 must also be completed if the person has received distributions from an IRA during that year and have made nondeductible contributions during that year. The information listed on the form will help the IRS decide on how the distributions and contributions match up. Usually, where a distribution is shown to be matched up to a past nondeductible contribution, that distribution will not be taxed.

A taxpayer must also complete Form 8606 if they convert one of three types of IRA — known as a traditional, SIMPLE or SEP IRA — to another type known as a Roth IRA. This is because a Roth IRA does not allow for tax deferral. This means that in most circumstances, contributions to an IRA are treated as non-deductible regardless of the person's circumstances, while distributions are usually not taxed.