When to file
File Form 8606 for any year you make a nondeductible contribution to a traditional IRA, take a distribution from a traditional IRA when you have a basis (nondeductible contributions), convert any portion of a traditional IRA to a Roth IRA, or take a distribution from a Roth IRA before age 59½ (and not yet held five years).
Why basis tracking matters
Without Form 8606, the IRS assumes all of your traditional IRA distributions are taxable. Filing Form 8606 establishes the cost basis (after-tax money) in your IRA and ensures you are not taxed twice on amounts you contributed with after-tax dollars.
Backdoor Roth contributions
High earners who exceed the Roth IRA contribution income limit often use the "backdoor Roth" — contribute to a nondeductible traditional IRA, then convert it to a Roth. Form 8606 is the form that documents both halves of the strategy. The pro-rata rule treats the conversion as proportionally distributed across all IRA balances, so existing pretax IRA dollars can complicate the math.
Penalty for not filing
There is a $50 penalty for failing to file Form 8606 when required, but the larger consequence is losing track of basis — paying tax twice on the same dollars when you eventually take distributions. Always file 8606 in any year you make a nondeductible contribution, even if you do not otherwise need to file a return.
Roth conversions
Part II of Form 8606 reports Roth conversions. The taxable portion of a conversion is included in income in the year of the conversion. Plan conversions for low-income years to minimize the tax cost.
What it does not cover
Form 8606, Nondeductible IRAs does not stand alone — it lives inside a small ecosystem of supporting forms, schedules, and elections that together carry the full weight of a small-business return. Knowing what Form 8606, Nondeductible IRAs does not handle is just as important as knowing what it does. The instructions list the cross-references explicitly: items computed elsewhere (Schedule C net profit, Schedule SE self-employment tax, Form 4562 depreciation), items reported on a separate form (Form 8829 home office, Form 1099-NEC information returns), and items handled by an entirely different return entirely (Form 1120-S for S-corps, Form 1065 for partnerships). Drawing the boundary cleanly avoids double-counting and avoids leaving deductions on the table.