There's an IRS form most people have never heard of, and most who should file it don't. Form 8606 tracks non-deductible IRA contributions and Backdoor Roth conversions. Failing to file it (or filing it incorrectly) can mean paying tax twice on the same money — sometimes thousands of dollars unnecessarily. The form takes 5 minutes to complete. Most self-employed people and high earners doing Backdoor Roth conversions skip it, then discover the consequences years later.
What Form 8606 does: tracks 'basis' in your traditional IRA. When you make non-deductible contributions (typical for high earners using the Backdoor Roth strategy), the contribution dollars don't generate a current deduction. They become 'basis' — money you've already paid tax on. When you eventually withdraw or convert, that basis comes out tax-free. The earnings portion is taxable.
The problem: without Form 8606 documenting the basis, the IRS treats EVERY dollar you withdraw as taxable. So you've paid tax once when you earned the money (no deduction), and you'll pay tax again when you withdraw (since the IRS doesn't know about your basis).
Concrete example: 2026, you make a $7K non-deductible contribution to your traditional IRA, then convert to Roth (Backdoor Roth strategy). You don't file Form 8606. The IRS records: $7K of contribution and $7K of conversion. No basis tracked. Later, in retirement, you withdraw $40K from a (rolled-over) Traditional IRA balance. Without Form 8606, the IRS taxes the entire $40K. With Form 8606, the IRS knows $7K of basis exists, so only $33K is taxable. Tax difference: $7K × 22% = $1,540. Multiply across years of unrecorded contributions: thousands of dollars unnecessarily paid.
Who should file Form 8606: anyone who makes non-deductible IRA contributions (because their income is too high to deduct, or because they have a workplace retirement plan with income above the threshold), anyone who converts Traditional to Roth IRA, anyone who takes distributions from a Roth IRA before age 59½, and anyone who inherits an IRA from someone with basis.
When to file: by tax deadline (April 15) for the tax year of the contribution. The form attaches to your Form 1040.
Penalty for not filing: $50 per missed Form 8606. Trivial in absolute terms but compounded across years can reach $250-$500 of pure penalty.
Bigger cost: forgetting basis means you'll likely pay tax on already-taxed money. Every year you didn't track basis is a year of contributions you can't easily recover.
What if you've forgotten in past years? File Form 8606 retroactively for each year you should have. The IRS accepts late-filed Forms 8606 (some restrictions apply for very old years). Reconstruct from your records: contribution amounts, conversion amounts, and basis as of year-end. Submit each year separately. The IRS isn't typically harsh about late Form 8606 filings — they just want the documentation.
How to actually maintain basis tracking: dedicated spreadsheet listing all non-deductible contributions and conversions. Updated annually. Year-end Form 8606 captures the running total of basis. The form has line for 'Basis in traditional IRAs at end of year' — keep that running total straight across years.
Backdoor Roth specific issue: most people doing Backdoor Roth don't realize Form 8606 must be filed. They contribute to traditional IRA, immediately convert, and assume the conversion was tax-free. Without Form 8606 documenting the contribution as non-deductible (basis), the IRS may treat the conversion as fully taxable. Result: tax on $7K of contribution PLUS tax later on the same $7K when eventually withdrawn — double taxation.
Pro-rata rule complication: if you have OTHER pre-tax IRA balances (from rollovers, deductible contributions, etc.), the pro-rata rule treats your conversion as proportional across all your IRA balances. Form 8606 calculates this. So if you have $93K of pre-tax IRA balance and make a $7K non-deductible contribution (now $100K total), then convert $7K, only 7% of the conversion is tax-free (your basis as a percentage of total IRA balance) and 93% is taxable. The form does this calculation.
Practical implication: roll old pre-tax IRA balances into your current 401(k) BEFORE doing Backdoor Roth, to avoid the pro-rata complication. Then your Traditional IRA balance is just the recent non-deductible contribution, the conversion is essentially tax-free, and Form 8606 cleanly tracks the small amount of basis.
Other situations Form 8606 matters: inherited IRAs with basis (the original owner's basis flows to you), disability distributions before 59½, qualified disaster distributions, distribution after death of spouse (special rules). All require Form 8606 to track properly.
If you've been doing Backdoor Roth for years without filing Form 8606: stop. Reconstruct your basis by going back through all contributions and conversions. File late Forms 8606 for each year. Going forward, file every year you have non-deductible activity. The compliance cost is tiny — the future tax savings can be substantial.