Form 8606 for Dummies

[kannon]

Good Morning All -

I have been searching online here about 8606s and I think I have been making mistakes for a number of years. GREATLY appreciate some info/feedback on what to do.

What I think I know.

1) Non-Deductible traditional IRA. Need to use Form 8606 to report contributions to non-tax deductible traditional IRAs. For a number of years we contributed to tIRA but because of salary limitations/employer 401K we did this on a non-deductible basis.

Question - while I filled in information about what we contributed each year in Part I, is the 8606 also used to document your continuing changing non-deductible contribution basis (i.e., if I contributed $4000 in 2015 and $5000 in 2016, I would indicate in the 2016 Form 8606 a contribution of $5000 (line 1) and a basis of $9000 (line 2))?

2) Roth IRA Contributions. Since these are done with taxed money, we do not need to do anything with respect to form 8606. Correct?

3) 401K conversion to a tIRA. Similar to above, Form 8606 is not required.

4) Conversion of tIRA to Roth IRA. Need to complete Part II of Form 8606. Correct?

5) Finally, down the road when we pull money out of our tIRA or Roth IRA, we would use Part I (tIRA) or Part III (Roth IRA) of Form 8606?

Appreciate your feedback and experience. If I have been messing up 8606s dating back to 2005, what is the best course of action with the IRS.

Thank you!!

Kannon

 

[kaneohe]

1) correct in concept but line 1 is current contribution to basis and line 2 is prior basis (from line 14 of prior 8606) and line 14 is new total basis.
Note line 2 says: 2 Enter your total basis in traditional IRAs (see instructions)
Generally IRS forms are well designed and self-guiding but when they say see instructions, they mean it since they mean that there is not enough room on the form itself for the instructions for that line. You ignore that friendly hint at your own peril.
2)correct
3)correct, but not for same reason: Roth is after-tax funds; 401K is (assumed)
pre-tax
4)and Pt. I if you have basis
5)correct

for corrections to 8606, get the correct version for the year(s) in question,
start w/ the oldest year, and work sequentially forward with the correct numbers, send to IRS w/ explanatory note.

 

[golfnut]

Regarding no. 5, I thought 8606 was only required for distributions from roth ira. In other words, not required for dist. from tiRA?

 

[kaneohe]

Regarding no. 5, I thought 8606 was only required for distributions from roth ira. In other words, not required for dist. from tiRA?

generally that is true,but if you have basis in TIRA you need to fill in 8606 to get the correct taxable amount.

 

[golfnut]

generally that is true,but if you have basis in TIRA you need to fill in 8606 to get the correct taxable amount.

Thanks-I thought TIRA distributions were taxed at one's overall ordinary tax rate. I'm kinda confused.

 

[kaneohe]

Thanks-I thought TIRA distributions were taxed at one's overall ordinary tax rate. I'm kinda confused.

Normally TIRA contributions are deductible. You take a deduction for them so basically they are not taxed wages. You don't pay taxes on them when you contribute to TIRA; however when you withdraw them, then they are fully taxed at your ordinary tax rate.


OP is discussing non-deductible TIRA contributions (basis). If your income is too high, you can't take the TIRA deduction so it is a non-deductible contribution. Since you didn't get a tax deduction, the contribution was taxed so it would not be fair if you were taxed on the withdrawal of those contributions. However you will be taxed on the earnings and F8606 calculates how much is basis and how much is not.

 

[exnavynuke]

Thanks-I thought TIRA distributions were taxed at one's overall ordinary tax rate. I'm kinda confused.

Most people only have deductible contributions in their tIRA. Thus the account consists of gains that haven't been taxed and contributions that haven't been taxed. In that situation, all distributions come from pre-taxed sources of money and are thus all taxed.

Non-deductible contributions are taxed already, so the contribution portion of that later balance is not taxed when withdrawn. If you contribute $5k to a tIRA with nondeductible contributions and that's it, 30 years later it's at $15k and you withdraw the money, $5k of it wouldn't be taxed. If you withdraw a partial amount, it's done on a percentage basis based on what percent of the account is from taxed contributions.

 

[golfnut]

Thanks, my bad. I didn't realize the op was only referring to non-deductible TIRA contributions.