Form 8606: Tracking Nondeductible IRA Contributions

Every nondeductible traditional IRA contribution must be reported on Form 8606 in the year it is made. Without this form, the IRS has no record that you deposited after-tax money into your IRA. When you later withdraw that money or convert it, it gets taxed again as if it were pre-tax gains. Form 8606 is the only way to establish that certain IRA dollars are “basis”—money you’ve already paid tax on—so they don’t get taxed a second time.

Why nondeductible contributions exist

A traditional IRA usually allows you to deduct contributions on your tax return, reducing your taxable income. But if your income exceeds certain thresholds and you have access to an employer retirement plan, the deduction phases out or disappears entirely. Once the deduction is unavailable, you can still contribute to a traditional IRA—but the contribution is nondeductible. You pay tax on that money now and again later when you withdraw it.

This scenario is common for high-income earners and is often a deliberate step in a backdoor Roth conversion: contribute nondeductible amounts to a traditional IRA, then immediately convert the IRA to a Roth. The conversion itself is taxable based on gains, but the nondeductible portion is not.

The double-taxation trap

Suppose you contribute $7,000 to a traditional IRA as a nondeductible contribution in 2026. You don’t deduct it on your 2026 tax return (because you made a nondeductible contribution). Over the next five years, the account grows to $10,000 due to investment gains. In 2031, you withdraw all $10,000.

Without Form 8606: The IRS sees a $10,000 traditional IRA withdrawal and assumes it is all pre-tax money. You owe tax on the full $10,000 at your marginal rate. But $7,000 of that was after-tax money you already paid tax on in 2026. Result: you pay tax on $7,000 twice.

With Form 8606: You file Form 8606 in 2026 reporting the $7,000 nondeductible contribution. When you withdraw in 2031, Form 8606 lets you exclude the $7,000 from taxable income. Only the $3,000 gain is taxable.

How Form 8606 works

Form 8606 has separate sections for traditional, SEP, and Simple IRAs. For a nondeductible contribution to a traditional IRA, you fill out Part I:

• Line 1: Enter the nondeductible contribution (the amount you paid with after-tax dollars).
• Line 2: The balance of your traditional, SEP, and Simple IRAs combined at the end of the prior year (for 2026, use the 12/31/2025 balance).
• Line 3: Any traditional IRA distributions during the current year (if you haven’t taken any, write zero).
• Line 4: The fair market value of all your IRAs at year-end.
• Line 5: A simple calculation that yields your total nondeductible contributions to date.

The form then follows you forward into any conversions or withdrawals.

Part II: Conversions and rollovers

If you convert your traditional IRA to a Roth (or roll it into another retirement plan), Form 8606, Part II, tracks what portion of the conversion is nondeductible.

For example, you have $100,000 in a traditional IRA: $70,000 pre-tax (deductible contributions and growth) and $30,000 nondeductible basis. You convert the full $100,000 to a Roth. The conversion itself is a taxable event, but Form 8606 tells you that $30,000 of the conversion is not taxed (it was already taxed when contributed) and $70,000 is taxable.

This is especially important for backdoor Roth conversions, where the entire point is to avoid taxing the nondeductible portion. Without Form 8606, the IRS would tax the full conversion.

Part III: Roth IRA conversions and withdrawals

If you receive a Roth conversion and have nondeductible basis, Form 8606, Part III, calculates how much of the Roth distribution (if any) is taxable. Roth distributions are tax-free if the account has been open five years and you meet certain age or hardship conditions. Form 8606 ensures you’re not taxed on the nondeductible portion you’ve already paid tax on.

The pro-rata rule

Here’s a critical gotcha: the IRS applies the pro-rata rule to all your IRAs combined. If you have:

• A traditional IRA with $90,000 pre-tax money,
• A second traditional IRA with $10,000 nondeductible basis,
• And you convert $50,000 to a Roth,

The conversion is treated as 90% pre-tax and 10% nondeductible (pro-rata across all your IRAs). So $45,000 of the conversion is taxable and $5,000 is not. You cannot cherry-pick and convert only the nondeductible $10,000 without tax.

Form 8606, Part II, enforces this pro-rata calculation. It sums all traditional, SEP, and Simple IRA balances (not Roth) to determine the percentage.

When to file Form 8606

You file Form 8606:

1. Every year you make a nondeductible contribution, even if you don’t otherwise owe tax and file a return. If you made a nondeductible contribution and are not required to file Form 1040, you still file Form 8606 alone to create an IRS record.

2. Every year you convert a traditional IRA to a Roth, even if the conversion is entirely pre-tax (no nondeductible basis). The conversion itself is a taxable event, and Form 8606 documents the pro-rata split.

3. Any year you distribute funds from a traditional IRA and you have nondeductible basis, to exclude the nondeductible portion from income.

If you skip Form 8606 one year, the consequence compounds. The IRS may audit subsequent conversions or withdrawals and claim the entire amount is taxable because you never established basis. Amended returns (Form 1040-X) and amended Form 8606s can fix prior years, but the process is painful.

Backdoor Roth conversions and Form 8606

A backdoor Roth conversion is the main reason many people file Form 8606:

1. You contribute $7,000 to a traditional IRA (nondeductible).
2. You file Form 8606 reporting the $7,000 nondeductible contribution.
3. You immediately convert the full $7,000 (plus minimal earnings) to a Roth IRA.
4. Part II of Form 8606 shows the conversion amount, and it calculates that most or all of the conversion is nondeductible basis, so little or no tax is owed.

Without Form 8606, the IRS could claim that you converted pre-tax money and owe tax on the entire amount.

Amended Form 8606 and corrections

If you file a return in 2026 without Form 8606 but later realize you made a nondeductible contribution, you can file Form 1040-X (amended return) and include an amended Form 8606 to establish the basis retroactively. However, this is only available for the prior six years under normal statute rules. File the amended form and return as soon as you realize the error.

Inherited IRAs and Form 8606

If you inherit a traditional IRA from someone who made nondeductible contributions, the non-deductible basis passes to you. However, Form 8606 applies only to the original depositor and their spouse. As a non-spouse beneficiary, you don’t file Form 8606; instead, you track the inherited nondeductible basis separately and use it to exclude the nondeductible portion of any distributions you take. Consult a tax professional if you inherit an IRA with unknown contribution history.

The pro-rata rule and the need for Form 8606

The pro-rata rule is why Form 8606 is non-negotiable if you have multiple IRAs. Consider this scenario: you funded a $100,000 traditional IRA with deductible contributions in 2000. In 2024, you make a $7,000 nondeductible contribution to a new traditional IRA and file Form 8606. In 2025, you convert $7,000 from the new IRA to a Roth, thinking it’s all nondeductible.

Without proper Form 8606 tracking: The IRS applies the pro-rata rule and treats your $7,000 conversion as a 93% pre-tax / 7% nondeductible split (roughly). You owe tax on ~$6,500 of the conversion.

With Form 8606: You still owe tax on the same amount because the pro-rata rule is mandatory. But Form 8606 documents that you followed the rule correctly, and you can verify the calculation if audited.

Form 8606 doesn’t eliminate the pro-rata rule, but it documents your basis and proves you understand the rule. That documentation is critical when the IRS questions a conversion.

See also