You may have noticed the vague and hyphenated names of various IRS forms that seem to have no connection to the purpose they serve. When filing for your tax return, it’s understandable if you get confused.
For non-deductible contributions made to an individual retirement account (IRA), Form 8606 is the one you use. If you forgot to file for it or if you didn’t even realize that you were supposed to, don’t worry, it’s not the end of the world.
After-tax dollars are what non-deductible contributions to an IRA are all about and this is a major distinction. These contributions don’t provide you a tax break in the year you make them because you’ve already paid taxes on this money. So the question now is, do you really have to do that or should you have just contributed to a traditional IRA and deduct those contributions from your taxable income during tax filing season?
First thing first: making deductible contributions to a traditional IRA cannot be made by everyone. If you or your spouse are covered by a retirement plan through your employer, your deductible contributions will be limited by the IRS. Some income limit is also applicable. Making non-deductible contributions is sometimes the only choices some taxpayers have if they want to save more for retirement.
Non-deductible contributions growth is tax-deferred. Until you withdraw them, it’s not necessary for you to pay taxes on any gains. But since you’ve already been taxed on that money, you no longer have to pay taxes on your own contributions. For tax purposes, the IRA uses your non-deductible contributions as the basis.
In order to work out in the end when you’re tired and start taking that money, the IRS will find out and will keep track of your non-deductible contributions.
If you’ve failed to file Form 8606 in previous years after making, say, five non-deductible IRA contributions in any of those years, the contributions were never deducted on your tax return either. The IRS may no longer charge you with a penalty if you submit Form 8606 today for each of those years.
As for those who filed an amended 1040 after all this is straightened, this is what the IRS says:
The IRS will process Form 8606 that was filed late even one that is filed after the regular three-year statute of limitations for claiming a refund has expired. This is even though Form 8606 is usually submitted with a timely-filed Form 1040. Even without a Form 1040 or a Form 1040X, the Form 8606 can be submitted.
Another example is a 66 years old taxpayer who’s never taken a distribution. He filed one Form 8606 for each year he made a non-deductible contribution. His basis will then be established in the IRA and he is given two types of eligibility: convert his non-deductible IRAs into Roth IRAs or he could begin taking distributions from the non-deductible IRAs.
You also don’t have to file an amended return according to the IRS.
If you made IRA contributions within the last three years, you have additional options. Let’s assume you qualify to make deductible contributions. The IRS gives you the right to treat them as either deductible or non-deductible depending on your choice.
You would be required to file an amended tax return using Form 1040X if you want to claim the deductions. For each year that you want to go back and take advantage of the deduction, that’s what you’re going to do. However, you are only allowed to do this within three years of the original filing deadline. You will be required to file an amended return by April 15, 2019, which is the last day to claim a tax refund for that tax year if you want to claim an IRA deduction for the 2016 tax year.
If you think you need help in figuring out if doing this or a Roth IRA conversion would make the most financial sense for you at this point, consider working with a tax professional or an accountant who is experienced in this area.
Missing forms up through the 2017 tax year, a $50 penalty will be charged for those who file 8606 late. If you’re able to prove to the IRS that the cause for the delay is reasonable, they may waive this penalty.
Debi G Hill, CPA