How should I keep track of my non-deductible IRA contributions to accurately report them on Form 8606?

Tracking your non-deductible IRA contributions is critical to prevent "double taxation"-paying tax once when you earn the money (since the contribution isn't deductible) and again when you withdraw it. Because IRA custodians report total values (Form 5498) but do not track which dollars are pre-tax versus after-tax, the burden of proof falls entirely on you to track your "basis" (the already-taxed amount).

1. Introduction

If you make non-deductible contributions to a Traditional IRA, you must file Form 8606 with your tax return. This form acts as a cumulative ledger of your after-tax basis in your IRAs.

This applies to anyone whose income exceeds the deductibility limits for a Traditional IRA but who chooses to contribute anyway (often as part of a "Backdoor Roth" strategy). The primary goal of tracking this is to ensure that when you eventually take distributions, the portion representing your return of basis is tax-free under the pro-rata rule.

Relevant Law:

• IRC § 408(o): Defines non-deductible contributions and the requirement to report them.
• IRC § 6693(b): Imposes a 50 penalty for failure to file Form 8606 and a 100 penalty for overstating non-deductible contributions.

2. Core Explanation

The Mechanism: Cumulative Basis on Form 8606

The IRS does not keep a running total of your basis for you; Form 8606 is the only official mechanism for this.

• Line 1: Reports new non-deductible contributions for the current tax year.
• Line 2: Carries over your total basis from previous years (from Line 14 of your last filed Form 8606).
• Line 14: Results in your new total historical basis, which must be carried forward to next year’s return.

Crucial Step: Every year you file a tax return, you must check Line 14 of the previous year’s Form 8606 and enter that number on Line 2 of the current year’s form. If you miss this step, your basis "disappears" in the eyes of the IRS, and future withdrawals may be fully taxed.

Required Record Keeping Documents

According to IRS Pub 590-A and Form 8606 instructions, you must retain the following documents indefinitely (until the IRA is fully drained):

1. Form 8606: Keep copies of every Form 8606 you have ever filed.
2. Form 1040 (Page 1): To prove that you did not claim a deduction for the contribution in specific years.
3. Form 5498 (IRA Contribution Information): This form is sent by your custodian by May 31st each year. It proves the fact and amount of the contribution, though it does not specify deductibility.
4. Form 1099-R: If you took any distributions or performed Roth conversions, keep these to cross-reference with the distributions reported on Form 8606.

The "Pro-Rata" Rule (Why Accuracy Matters)

You cannot simply choose to withdraw only your non-deductible (after-tax) money first. Under IRC § 408(d), all your Traditional IRAs (including SEPs and SIMPLE IRAs) are aggregated and treated as one single account.

• Every distribution is treated as containing a proportional mix of pre-tax and after-tax money.
• Example: You have $90,000 of pre-tax money and contribute $10,000 non-deductible (Total $100,000). Your basis is 10%. If you withdraw $5,000, only $500 (10%) is tax-free. The remaining $4,500 is taxable income.
• Without accurate Form 8606 records proving that $10,000 basis, the IRS will assume the entire $5,000 withdrawal is taxable.

Audit and Practitioner Consideration

Common Challenges & Traps

1. Lost Basis (The "Shoebox" Problem): Taxpayers frequently change tax software or CPAs and fail to carry over the Line 14 data. The IRS Automated Underreporter (AUR) unit often flags distributions as fully taxable if a current Form 8606 isn't attached to claim the basis.

   • Correction: If you missed filing Form 8606 in past years, you can file a standalone Form 8606 for each missing year (signed and dated) to establish your historical basis. There is nominally a $50 penalty for late filing, but it is often waived for reasonable cause (e.g., lack of tax liability impact at the time).

2. The "Backdoor Roth" Timing Trap:

   • Many taxpayers contribute non-deductible funds and convert to Roth immediately.
   • Risk: If the contribution happens in Year 1 (e.g., Dec 2025) but the conversion happens in Year 2 (Jan 2026), the contribution is reported on the 2025 return, but the conversion is reported on the 2026 return. Basis tracking across these two years is critical to avoid paying tax on the conversion.

3. Spousal IRAs are Separate:

   • Form 8606 is taxpayer-specific. You cannot mix your basis with your spouse's. If both spouses have non-deductible contributions, you must file two separate Forms 8606.

4. Legislative Note (OBBB Act):

   • While the "One Big Beautiful Bill Act" (effective July 2025) introduced new "Trump Accounts" (Section 530A) and modified Opportunity Zone rules, it did not alter the fundamental requirement of tracking Traditional IRA basis via Form 8606. The standard rules of IRC § 408(o) remain in effect for 2025/2026 returns.

3. Summary

• Primary Tool: Form 8606 is the mandatory ledger for tracking non-deductible basis.
• Key Data Point: Always ensure Line 14 (total basis) from the prior year is carried to Line 2 of the current year.
• Retention: Keep Forms 8606, 5498, and 1040 indefinitely.
• Risk: Failure to track basis leads to double taxation on withdrawals and Roth conversions.

4. Suggested Next Steps

• Audit Your Files: Locate your most recent filed tax return and verify if Form 8606 was included. Check Line 14 to see your cumulative basis.
• Reconstruct if Necessary: If you have made non-deductible contributions in the past but see no basis on your current return, review previous years' bank statements and Forms 5498 to reconstruct your history. You may need to file retroactive Forms 8606.
• Check Current Contributions: If you made a non-deductible contribution for tax year 2025 (before April 15, 2026), ensure it is reported on the 2025 Form 8606, even if you have already converted it to a Roth IRA.