What Is Form 8606 And When To File Form 8606?
by Ankita Tripathy Finance 30 May 2022
If you are someone who pays taxes and is very close to retirement, then you must know about form 8606. Have you ever filed for this form?
If yes, then you are a champ, as filing this form saves you a lot of money down the line.
Want to know more about the form 8606? Keep reading this article till the end.
What Is Form 8606?
Form 8606 is a nondeductible IRA.
Right! That makes it so much easier to understand!
Hey, I am here to explain. So hold your horses and read the article till the end.
Form 8606 is something that the filers can use to make nondeductible contributions (which are counted as assets that are after-tax in nature) to the IRA. Now, what is IRA?
IRA is the acronym that stands for Individual Retirement Account. This is like a savings account with several tax advantages. First, individuals are free to make a decision on whether they would want to open an account to save and invest that would benefit them in the long run.
The money that you are able to save in the IRS cannot be withdrawn whenever you want. Unless the account holder is 59 years of age, that too free from any incurring tax penalty, they cannot withdraw the money.
The sole purpose of the IRA is that you, as a taxpayer or account holder, are investing or saving money for your life after retirement. Therefore, if you withdraw the money so saved before your retirement, you defeat the entire purpose of the IRA.
IRS form 8606 makes it possible for you to get back a major portion of the money after your retirement. You use this form to report the nondeductible contributions.
Filing for the form 8606 makes it possible for you to save a lot of money down the road as you are not subjected to income tax by the federal law more than once.
Read More: Finding the Right Tax Professional to Help
What Is A Nondeductible IRA Contribution?
When I talk about the contributions that an individual makes to the IRA, you should understand that these contributions are deductible. This means that this money can be subtracted from the gross income while you, the taxpayer, are completing the tax form.
However, there are some Nondeductible Contributions.
Nondeductible contributions are the money that you do not deduct from the taxes that you pay.
When you file for form 8606, you get it on record that the government has already taxed you for a portion of your money. Filing form 8606 helps you in the future as you will not be taxed again when you get the money back at the time of taking the distribution.
When To File For Form 8606?
In case you do not know when to file the Form 8606, let me help you out with that.
If you are contributing for the after-tax money or nondeductible contributions to a traditional IRA, you must file form 8606 every year.
At the same time, every year, when you get the distributions from either Roth IRA or the traditional IRA, you must also file the form 8606.
In case you have ever contributed for the nondeductible contribution or the after-tax money, you must file form 8606.
It is highly important that you retain the copies of your tax-related documents as well as all the form 8606 that you have filed till the end. Filing this form will help you ensure that you are able to get back a portion of the money without being taxed for it.
You May Like To Read This: Mistakes To Avoid While Filing Income Tax Returns
Uses Of Form 8606:
If you think that you can only report the nondeductible with the help of form 8606, then you are wrong. There are some other benefits of filing this form.
You can use this form to report other transactions that are related to IRA. you can also use the form 8606 to:
- Take distributions from the SEP IRA or traditional IRA after your nondeductible IRA contribution.
- Convert any form of IRA into Roth IRA.
- Take distributions from the Roth IRA.
Frequently Asked Questions (FAQs):
Let me make this clear; if you are someone who has ever contributed for the after-tax money or the nondeductible contribution, then you must file form 8606. It is best to file it every year at the time of your nondeductible contribution.
In case you want to know whether you have made a nondeductible IRA contribution or not, you need to track it. You can contact the government if you want to track the status of the nondeductible contribution.
The easiest method to do so is to file for form 8606.
Backdoor Roth is more like an informal or unofficial Individual Retirement Account type that is used by high taxpayers who want to create tax free Roth permanently. The process helps in converting the regular or traditional IRA into Roth IRA.
So, fill up form 8606 for a backdoor Roth IRA.
Money that you have contributed to the traditional Individual Retirement Account (IRA) that you do not deduct the money is known as Nondeductible Contribution.
Wrapping Up!
If you are someone who is near their retirement, I hope that you have been filing form 8606 every year.
Form 8606 is a way of making sure legally that you get a major portion of the money back as you receive our distributions. If you do not file the form, you may fail to claim that you had made the nondeductible contribution.
If that happens, you will be charged twice by the federal government when you get back a portion of the money after your retirement.
Filing form 8606 helps you save money in the long run as it makes sure that you can claim the money without the federal government being able to charge you twice.
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