If you made contributions to a traditional IRA during your lifetime, and you weren’t able to deduct all of the contributions, you have some basis in your IRA.
If you have a basis in the IRA above zero, it means a portion of your distributions is a return of principal and should not be subject to federal taxes.
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Nontaxable Distributions from Traditional IRA – Complete Form 8606
Saving for retirement is an important financial goal for many individuals, and a traditional Individual retirement account (IRA) is a popular choice for many people. Contributions to a traditional IRA are typically tax deductible, meaning that individuals can reduce their taxable income by the amount they contribute to the account. However, when it comes time to take distributions from the IRA, there are certain rules and regulations that individuals need to be aware of to avoid unnecessary taxes and penalties.
One such rule pertains to nontaxable distributions from a traditional IRA. Distributions from a traditional IRA are generally taxable, as the funds in the account were originally contributed on a pre-tax basis. However, there are certain circumstances in which distributions can be nontaxable.
For example, if an individual has made after-tax contributions to their traditional IRA, these funds can be withdrawn without incurring additional taxes. Additionally, if an individual makes a qualified distribution for a first-time home purchase or higher education expenses, these distributions may also be nontaxable.
In order to report nontaxable distributions from a traditional IRA, individuals must complete IRS Form 8606. This form is used to track contributions to a traditional IRA that were made on a post-tax basis, as well as to report any nontaxable distributions that are taken from the account.
When completing Form 8606, individuals will need to provide information about their total IRA contributions, the portion of those contributions that were made on a post-tax basis, and any nontaxable distributions that were taken from the account. This information is used to calculate the taxable portion of IRA distributions and ensure that individuals do not pay more in taxes than necessary.
It is important for individuals to carefully complete Form 8606 and include it with their annual tax return to accurately report any nontaxable distributions from their traditional IRA. Failing to report these distributions correctly could result in additional taxes, penalties, and interest from the IRS.
In summary, nontaxable distributions from a traditional IRA can be an important source of funds for individuals, but it is crucial to follow the rules and regulations set forth by the IRS to avoid unnecessary taxes and penalties. By completing IRS Form 8606 and accurately reporting any nontaxable distributions, individuals can ensure that they are in compliance with the tax code and maximize their retirement savings.
In 2021, I took money from my savings account and opened a non-deductible IRA. I started investing in stocks from a pre-determined fund at Merrill. Within weeks, I realized being in the stock market was not a good idea. I stopped the investment and later (within a matter of a month or so) withdrew all the money from the IRA and put it back into my savings account. I lost about $8.00. Do I have to fill out an 8606 for 2022?
How do I convert to Roth when the non deductible 6000 dollars drop in value from the market? Now it’s 5,700 and the 1099r show $5700 distribution. Do I put 5700 on the 8606 as the basis and conversion amount ? It show a remaining basis in the traditional which I don’t want. I want to be zero.
You really did a very fantastic presentation. Clear and understandable. Right time for my IRA distribution. Can please explain the box with capital gain on 1099 form?
FORM 8606 TOTAL BASIS BALANCE WHEN I DIE. How does my spouse handle the balance? Thank you!
Jason, My corpration that I own always contributes about 8,000 annually to my SEP. At the end of the year, I always convert that SEP into my ROTH account to pay immediate taxes. I only record that distribution onto line 4 of my Form 1040 to pay the tax on it. I never prepared the Form 8606. Does this transaction trigger a Form 8606 to be prepared? I have a few years of these exact transactions. What do I do now? Thanks for a response. THUMBS UP!!!!
Jason, how would you fill 8606 for the following situation.
1. Individual contributed $6k in traditional IRA and withdrew within a week realizing they are not eligible as 401k contribution up to the limit are being made through their employer. Broker issues a taxable $6k distribution 1099-R for the year.
2. Contributed $6k to Roth IRA for the same year, broker again issued a distribution for $6k, but non-taxable. Not sure why they would do this but refuse to change it.
Very helpful video! Thank you so much.
I have questions how to fill out 8606 for ROTH CONVERSION.
I contributed $500/month to Roth IRA direct in 2020 and found out my income was over the limit at the end of Dec 2020 (I get paid hourly , don't know exact my income every year ).
In March 2021, the contribution in Roth IRA was recharacterized to traditional IRA then converted to Roth IRA . I received 1099R of traditional IRA stating (Gross Contribution: $7,808.13, Taxable amount: $7,808.13, checked on ‘ taxable amount not determined’, Distribution Code:2) and 1099R of ROTH IRA stating (Gross amount: $7,439.16, Taxable amount: $0.00, Distribution Code: R). I've not filled out 8606 yet and I got confused. Can you help me???
After watching your video, I was thinking, I also need to fill out 8606 for 2020?? Not only 2021??
Are these 1099R correct? Do I owe taxes?
Thank you.
Great content – completing my return this week, had only bits and pieces of understanding of Basis and how the 8606 should be filled out – this helped put it all together. Cheers
Great video!!!! I have a problem I hope you can help me with. I have done this 8606 for several years now and in 2020 TurboTax did not auto data fill my total FMV of all traditional IRAs on Line 6, nor did it prompt me. As a result, since there was nothing entered on line 6, it used up my remaining basis of 20,922 which resulted in a refund. Is this ok with the IRS?
I've always been mystified about the 8606 because when I have entered my total FMV on line 6, I thought it would show a slight drop in tax liability at the top of TurboTax dashboard but the tax liability always increased several hundred dollars. What"s up with that? Thank you for doing this video!
Please don't stop making these videos. PLEASE!
Interesting thanks. I am working on my similar situation, but with a Roth IRA. So my contribution withdrawal, needing to figure the basis. Same instructions really.
Literally the only good explanation of this concept i could find. The excel sheet really helps illustrate how this works. Thanks!
Can you do a video for “how to file the 1099-R for early withdrawal of Roth IRA contributions?” Thank you