What Is IRS Form 8606?

The Internal Revenue Service requires U.S. taxpayers to file additional tax forms when certain conditions apply to their individual retirement account's status. IRS Form 8606 (Nondeductible IRAs) may be required to report changes in a Simplified Employee Pension (SEP), a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) or Traditional IRA, and distributions from Roth IRAs.

Function

IRS Form 8606 attaches to Individual Income Tax Form 1040, 1040A and 1040 NR at sequence number 48. The form is used if a taxpayer makes nondeductible contributions to a Traditional IRA or takes distributions from a Traditional or Roth IRA, or from SEP and SIMPLE retirement accounts. Additionally, for 2009 taxes, Form 8606 is used to report a conversion of portions of SEP, SIMPLE and Traditional IRAs to Roth IRAs. Completing Form 8606 provides the taxpayer with the total taxable amount of IRA distributions that must be reported as income for the tax year on Form 1040.

Features

The instructions that accompany Form 8606 provide a worksheet a taxpayer can use to determine the maximum amount she is entitled to contribute to a Roth IRA in one calendar year. Furthermore, a taxpayer's total basis (cost) in a Traditional IRA is reported to the IRS on Form 8606, and this amount can be used in subsequent tax years to calculate nontaxable amounts of distributions. With Traditional IRAs, the basis is all nondeductible contributions plus nontaxable amounts included in rollovers to the IRA, minus the sum of all nontaxable distributions.

Considerations

Taxpayers who receive a distribution from an IRA should also receive Form 1099-R from the trustee of the account showing the amounts returned. However, if Form 1009-R is not provided in a timely manner, the responsibility for reporting applicable amounts to the IRS remains with the individual taxpayer. If a taxpayer must report a nondeductible contribution and fails to file a required Form 8606, the IRS charges a penalty ($50 for 2009 taxes). If a taxpayer falsely claims nondeductible contributions in greater amounts than what was actually contributed, a $100 fine applies.

Reporting SEP Activity

Contributions to and distributions from a SEP retirement plan are reported in Part I of IRS Form 8606. A SEP, designed for small businesses, permits an employer to contribute to Traditional IRA accounts for each employee. Contributions and earnings on SEPs are tax-deductible. Contribution amounts can be varied to suit the employer's financial situation from year to year, but cannot exceed 25 percent of the employee's annual salary or $49,000 (as of 2010), whichever is less.

SIMPLE IRAs

Contributions, distributions and conversions involving SIMPLE IRAs (plans for small businesses with 100 employees or less that do not have other retirement plans) are reported to the IRS with Form 8606. In 2010, SIMPLE plans allowed an employee to contribute a maximum $11,000 annually. The employer can contribute an amount equal to 2 percent of the employee's annual income, or match the employee's contributions up to 3 percent of annual income.

References

• Internal Revenue Service: Instructions for Form 8606 (Nondeductible IRAs)
• Internal Revenue Service: Nondeductible IRAs
• U.S. Department of Labor: Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans)
• U.S. Department of Labor: SIMPLE IRA Plans for Small Businesses
• U.S. Department of Labor: SEP Retirement Plans for Small Businesses
• Internal Revenue Service: Instructions for Form 1040