In 2012, people under the age of 50 can contribute up to $5,000 per year to their Individual Retirement Accounts (IRAs) and people age 50 and older can contribute $6,000 per year and, depending on your Adjusted Gross Income (AGI) and whether you are covered by a retirement plan at work, some or all of the amount contributed to an IRA may be deductible.
If you are not able to deduct some or all of your contribution, you will need to file Form 8606 when you file your taxes. This form is important because it tracks all of your non-deductible contributions and establishes the cost basis in the IRA.
If you have basis in your IRA (have made non-deductible contributions over the years), you will not need to pay taxes on that portion of your IRA when it comes time to take distributions. If you fail to file the Form 8606, the assumption is that all of the money in the IRA was deductible and, therefore, will be taxed when it is withdrawn.
If you made a non-deductible IRA contribution in past years but did not file Form 8606, you can re-file the form but the IRS will charge you a penalty of $50.
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