This form is used to track nondeductible contributions you made to your Individual Retirement Account (IRA).
Here's a bit of context first — IRAs are accounts where you can save money for retirement with tax advantages. There are two main types: traditional and Roth.
- Traditional IRA — You often can deduct your contributions (meaning they lower your taxable income now), and you pay taxes later when you take money out in retirement.
- Roth IRA — Works the opposite way, you don't get a tax break when you put money in, but when you take money out during retirement, it's tax-free.
Now, what happens if you make a contribution to your traditional IRA but, based on your income and whether you have a retirement plan at work, you're not allowed to deduct it on your taxes? If you (or your spouse, if filing jointly) are covered by a retirement plan at work and your income exceeds certain levels set by the IRS, your contribution to a traditional IRA may not be fully deductible. That's where Form 8606 comes in. It helps you keep track of these nondeductible contributions.
Why is this important? Well, since you've already paid taxes on these nondeductible contributions, you shouldn't have to pay taxes on them again when you retire and start withdrawing money from your IRA. Form 8606 helps ensure you don't.
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Part I: This is where nondeductible contributions to your traditional IRA for the current tax year are reported and the total basis (i.e., the amount you've already paid taxes on) in your traditional IRAs.
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Part II: Reports any conversions you made that year from traditional, SEP, or SIMPLE IRAs to Roth IRAS.
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Part III: Distributions From Roth IRAs