# Form 8606: Nondeductible IRAs: What They are, How They Work

## What Is Form 8606?

[Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) [Form 8606](https://www.irs.gov/pub/irs-pdf/f8606.pdf), "Nondeductible IRAs," is used by filers who make nondeductible contributions to an individual retirement account (IRA). A separate form should be filed for each [tax year](https://www.investopedia.com/terms/t/taxyear.asp) that nondeductible contributions are made.

Normally, contributions to an IRA are [deductible](https://www.investopedia.com/terms/d/deductible.asp) from ordinary income. In some circumstances, however, people who participate in an employer retirement plan and whose households exceed a threshold of modified adjusted gross income (MAGI) might not be able to make these deductible contributions, though they can still contribute to an IRA.

### Key Takeaways

*   Filers who make nondeductible contributions to an IRA use IRS Form 8606.
*   Any taxpayer with a cost basis above zero for IRA assets should use Form 8606 to prorate the taxable vs. nontaxable distribution amounts.
*   File Form 8606 with Form 1040 or 1040NR by the due date, including due dates for extensions.
*   If taxpayers do not file Form 8606 in a distribution year, they may be required to pay income taxes (and possibly penalties) on what could be tax-free monies.

## Who Can File an 8606?

Participants should file Form 8606 in conjunction with the standard income tax forms (1040 or 1040NR) for individual filers. Any taxpayer with a cost basis above zero for IRA assets (a combination of post- and [pre-tax contributions](https://www.investopedia.com/terms/p/pretaxcontribution.asp), or deductible and nondeductible contributions) should use Form 8606 to prorate the taxable vs. [nontaxable distribution](https://www.investopedia.com/terms/n/nontaxable-distribution.asp) amounts.

If the taxpayer does not file IRS form 8606 in a distribution year, income taxes (and possibly penalties) may be due. What would ordinarily be tax-free money is now taxable.

## Re-characterizing an IRA

Younger investors should consider "[re-characterizing](https://www.investopedia.com/terms/r/recharacterization.asp)" traditional and Simplified Employee Pension (SEP) IRA assets as Roth assets. Assets that are so re-characterized are immediately taxable as ordinary income; money placed into a traditional or SEP IRA has usually never been taxed. When money comes out of a traditional or SEP IRA, it becomes taxable. Already-taxed money is _not_ taxed when it comes out of the account.

Not having to pay taxes on future distributions may outweigh the immediate tax bill caused by the re-characterization. Investors should speak with a tax professional before attempting a re-characterization.

> **Important**
>
> Form 8606 is also required whenever a taxpayer either converts a traditional or SEP IRA to a Roth IRA, or receives an IRA distribution that is attributable to previous nondeductible contributions.

## How to File Form 8606

File Form 8606 with Form 1040 or 1040NR by the due date, including due dates for extensions. If you're not required to file an [income tax return](https://www.investopedia.com/terms/t/taxreturn.asp) but are required to file Form 8606, sign Form 8606 and send it to the IRS at the same time and place you would otherwise file a 1040 or 1040NR.

Generally, after a taxpayer files their return, they can change a nondeductible contribution to a traditional IRA to a deductible contribution (or vice versa) within the time limit for filing Form 1040X, "Amended U.S. Individual Income Tax Return."

> **Article Sources**
>
> 1.  Internal Revenue Service. “[Instructions for Form 8606](https://www.irs.gov/pub/irs-pdf/i8606.pdf),” Pages 1 and 3.
>     
> 2.  Internal Revenue Service. “[IRA FAQs](https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras#Recharacterization%20of%20IRA%20Contributions).”
>     
> 3.  Internal Revenue Service. “[Instructions for Form 8606](https://www.irs.gov/pub/irs-pdf/i8606.pdf),” Page 2.
>     
> 4.  Internal Revenue Service. “[About Form 1040-X, Amended U.S. Individual Income Tax Return](https://www.irs.gov/forms-pubs/about-form-1040x).”