Documenting Nondeductible IRA Contributions on Form 8606

Form 8606 is the form that is used to document nondeductible (after-tax) contributions an individual has made to a traditional IRA. Form 8606 is used to establish the employee's "basis" in their account. When an individual has made both pre-tax and after-tax contributions to an IRA, a pro rata rule will apply so that any withdrawal or conversion will contain both taxable and non-taxable dollars, in proportion to the percentages of pre-tax and after-tax dollars in all of the individual's IRAs. Clients must only file Form 8606 in the year they make a non-deductible contribution and in any later year when they make a withdrawal or execute a conversion. When individuals use modern tax preparation software, that information will be carried over into future years, so that the software can compute obligations with respect to the pro rata rule in those later years. In other words, Form 8606 is not required every year unless the individual executes some type of triggering transaction. For more information on the importance of tracking IRA basis, visit Tax Facts Online. Read More: Link to Q3672.