What to Know about IRA Form 8606

Form 8606 is a US Internal Revenue Service tax form used to report non-deductible contributions to your individual retirement account (IRA). The IRA is a private account that allows you to save money for your retirement. It supplements your Social Security and other forms of personal retirement savings. The contributions to your IRA are not usually taxed, except when they are certain types of contributions. These are known as non-deductible contributions. You will need to use tax Form 8606 to file taxes on such contributions. The form should also be used to file taxes on contributions generated through certain types of distributions and conversions.

IRA Basics

There are several types of IRAs, including traditional IRAs, Roth IRAs and SEP IRAs. Each has its own features. Depending on the type, you may be able to take out some money before you reach retirement age, though, in many cases, this comes with financial penalties. The money that you take out is known as a distribution. Both contributions and distributions are not taxed unless certain circumstances occur. The circumstances vary depending on the type of IRA.

Traditional IRAs and Form 8606

The traditional IRA is the most basic type of IRA. Your contributions to traditional IRAs can fall into one of three categories: fully deductible, partially deductible and non-deductible. The deductible contributions aren't taxed and can be used as tax deductions. The non-deductible contributions are fully taxed, and partially deductible ones are partially taxed.

The categorization is based on your modified adjusted gross income (MAGI). To put it as simply as possible, MAGI is the number that goes in the last line of the first page of your 1040 tax form. If your MAGI is $55,000 or less, the contributions are fully deductible. If your MAGI is between $55,000-$65,000, they are partially deductible. If your MAGI is greater than $65,000, they are non-deductible.

If your contributions are non-deductible, you will have to report them on Form 8606. You must also use this to report any distributions you got from your traditional IRA.

Roth IRAs and Form 8606

The Roth IRA is a more recently introduced type of IRA. Unlike with a traditional IRA, you can't claim tax deductions on your contributions, but your contributions aren't taxed, either. Distributions are taxed unless they are qualified distributions. The qualified distributions are distributions that you make if you are older than 59, if you need money due to becoming disabled or if you need money for qualified first home expenses. However, you will be taxed regardless of whether your distributions are qualified during the first five years after you made your first contribution.

Finally, it should be emphasized that you must report all your distributions on Form 8606, regardless of whether they are taxed.

SEP IRAs and Form 8606

SEP IRA is an IRA into which your employer is allowed to make contributions. Otherwise, it's identical to the traditional IRA. You must use Form 8606 to report contributions and distributions that you would report for a traditional IRA if you made any non-deductible distributions to your traditional IRA. If you didn't make any non-deductible contributions, you should report your distributions on your Form 1040.

Reporting Conversions/Recharacterizations

If you have any type of IRA, you have an option of changing it from one type of IRA to another. This is known as recharacterization or conversion. The conversions are made by transferring the funds from one trustee to another within the same financial institution. The conversions come with certain restrictions related to your income and the value of the IRA that's being converted. You don't have to pay taxes on the conversions, but you do have to report them using Form 8606.

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