When to File an 8606

“The tax Form 8606 has become increasingly important thanks to the popularity of the Roth IRA and the rollover eligibility of after-tax assets from qualified plans”, says Denise Appleby at Investopedia.com.  You need to file this form when you contribute after-tax amounts to your traditional IRA and each year you take a distribution from your IRA provided you have after-tax amounts in a traditional, SEP or SIMPLE IRA plan.

Here are some times when you need to file Tax Form 8606:

If you do not claim a deduction on your traditional IRA contribution you need to file Part I of the form so that the IRS knows that the contribution is non-deductible and considered after-tax assets.

Every year you take a distribution from your traditional, SEP or SIMPLE IRA and have after-tax amounts in any of these plans, you must also fill out Part I of the 8606.  If you do not, you could pay income tax and suffer an early withdrawal penalty on money that is tax and penalty free.

If you convert to a Roth IRA, “you must be able to distinguish between the conversion assets and amounts representing regular Roth IRA contributions and earnings”, says Ms. Appleby.  You need to figure out if any amount of the Roth IRA distribution is subject to income tax or penalty.  You must complete Part II of the form.

Check out the full article here to see some more reasons you need to file a 8606.  Failure to file when needed may result in a $50 penalty and if the non-deductible contribution amount is overstated on the form, that could cost you $100!

If you have any questions about this or other IRA matters, contact the tax experts at the IRA Financial Group today!  And don’t forget to follow us on Twitter @BergmanIRA for alerts to new blog posts and helpful news and links.


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