IRS Form 8606 – Nondeductible IRAs

Form 8606 protects after-tax money in individual retirement arrangements from being taxed a second time and calculates taxable amounts for several IRA transactions. It reports nondeductible contributions to traditional IRAs, distributions when traditional IRA basis exists, conversions to Roth IRAs, and certain Roth IRA distributions. The final 2025 form and instructions are current.

The form follows the owner, not a particular financial institution. Traditional IRAs, SEP IRAs, and SIMPLE IRAs are often combined for the Part I pro rata calculation even when different custodians hold them. Each spouse files a separate Form 8606 using that spouse’s accounts and basis; filing a joint income tax return does not merge the IRA histories.

Part I begins with the contribution decision

A traditional IRA contribution is nondeductible when the taxpayer chooses not to deduct an otherwise deductible amount or cannot deduct it because of modified adjusted gross income and workplace-plan rules. The contribution can still be permitted even though no deduction is allowed. Report the nondeductible amount for 2025, including a contribution made by the 2026 due date and designated for 2025.

A contribution cannot be reported as nondeductible merely because it exceeded the annual contribution limit. Excess contributions follow correction and excise-tax rules, potentially involving Form 5329. Likewise, a rollover is not a regular contribution and does not create basis unless it includes an after-tax amount whose basis transfers under the applicable rules.

Line 2 carries traditional IRA basis from the end of the prior year. It should agree with the last filed Form 8606, adjusted for items such as returned contributions, certain distributions, or transfers. If an old form is missing, reconstruct basis from contribution records and prior returns before using a guess. The current filing does not erase unsupported years.

The pro rata rule looks across all traditional IRAs

When a taxpayer takes a traditional IRA distribution or completes a Roth conversion while basis exists, Part I determines the nontaxable fraction. The calculation combines year-end value, distributions, and conversions for all traditional, SEP, and SIMPLE IRAs treated as the taxpayer’s IRAs. Basis cannot be assigned only to the account that received the nondeductible contribution.

For example, moving a $7,000 nondeductible contribution from one traditional IRA into a Roth IRA does not necessarily create a $7,000 tax-free conversion when the taxpayer also owns a large rollover IRA. The year-end value of the rollover IRA enters the denominator, causing basis to be spread across the conversion and remaining IRAs. Closing or rolling accounts before year-end can have tax consequences that should be analyzed before executing a transaction.

Conversions are reported in Part II

A conversion moves value from a traditional, SEP, or SIMPLE IRA to a Roth IRA. Part II begins with the converted amount, uses Part I to determine any basis allocated to it, and reports the taxable balance. A direct trustee-to-trustee conversion and a distribution rolled to a Roth IRA are both conversions, but withholding from the distribution can create an amount not converted and possibly subject to additional tax.

A conversion is generally included in income for the year completed. It cannot be recharacterized back to a traditional IRA under current law. A prior-year regular IRA contribution may still be recharacterized under separate rules by its deadline, so distinguish a contribution recharacterization from a conversion reversal. Forms 1099-R and 5498 should be reconciled to the actual transaction.

Taxable conversion income is ordinary income, but it is generally not subject to the 10% early-distribution additional tax merely because it was converted. Amounts withheld or not rolled over may be different. Later distributions of converted amounts from the Roth IRA have their own five-year ordering and recapture rules.

Part III analyzes nonqualified Roth IRA distributions

A qualified Roth IRA distribution is generally tax-free and does not require the same Part III computation. Qualification typically requires satisfaction of the five-tax-year period and a distribution made after age 59½, because of disability, after death, or for a qualifying first-home purchase within the lifetime limit. When those tests are not met, Roth ordering rules apply.

Roth distributions are generally treated as coming first from regular contributions, then conversions and rollover contributions in chronological layers, then earnings. Regular contribution basis can come out tax-free. Conversion layers may be subject to the 10% additional tax if withdrawn within their separate five-year periods, while earnings may be taxable and subject to additional tax. Part III computes the taxable earnings component; Form 5329 addresses applicable exceptions or additional tax.

Inherited IRAs require separate attention

Basis in an inherited traditional IRA generally remains with that inherited IRA and is not combined with the beneficiary’s own traditional IRA basis. If the taxpayer inherited IRAs from different decedents, separate Forms 8606 may be required. The decedent’s last Form 8606 and estate records may be the only reliable evidence of inherited basis.

A spouse who treats an inherited IRA as their own can produce a different result from remaining a beneficiary. Beneficiary distribution schedules also do not change the pro rata nature of basis within the inherited account. Label account statements by decedent and preserve basis calculations through the final distribution.

Filing obligations and correction risks

Attach Form 8606 to the 2025 Form 1040, 1040-SR, or 1040-NR when a return is required. If no income tax return is otherwise required but Form 8606 is required, complete and sign the form and file it alone at the address in the instructions. Missing a required form can trigger a $50 penalty unless reasonable cause applies; overstating nondeductible basis can trigger a $100 penalty unless reasonable cause applies.

The IRS form page lists a correction for the 2024 instructions involving a line 25c worksheet. That item belongs to the 2024 product and does not replace the final 2025 instructions used here. When amending an older year, use that year’s form and all posted developments for that product.

Maintain a permanent IRA basis ledger

• Keep each filed Form 8606 and the return that carried its taxable amount.
• Reconcile Forms 1099-R and 5498 to contributions, rollovers, conversions, recharacterizations, and corrections.
• Record December 31 value for every traditional, SEP, and SIMPLE IRA included in aggregation.
• Separate inherited accounts by decedent and Roth conversion layers by year.
• Carry ending traditional IRA basis and Roth contribution history forward even in a year with no transaction.

Form 8606 is a cumulative record disguised as an annual form. A small omission can tax the same dollars again many years later. Complete the 2025 calculation only after the account history, tax documents, and year-end values tell the same story.

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