Definitely track and file 8606 when required. You have quality answers here but I wanted to join the discussion to add my circumstances so others might benefit from my experience. I made non-deductible contributions to my IRA in the 1980s for a few years that created basis. Roth IRAs were not yet in existence. My employer had no retirement plan but willingly matched your contribution to an IRA up to $1000 so you had immediately earned 100% on your investment. The limits you could contribute increased over the years as did the income threshold but the few years that I made non-deductible contributions have followed me into retirement.
Every distribution from a traditional IRA, whether that is a RMD or Roth conversion, has to be factored with your basis. For me, the basis is barely over 1% of the value of my IRA. The requirement to file form 8606 persists and is a real PITA for the complexity it adds to what should be a simple return for a retiree. I have written to taxpayer advocacy services and “they don’t find it inconvenient”. The only escape that I see would be costly and that would be to do a Roth conversion for the entire traditional IRA at once pushing me into a higher tax bracket.
One thing I considered was to simply ignore the “basis” and pay taxes a second time but there looms a $50 or $100 irs penalty for failing to file the 8606 when required. I’d like to begin hiring someone to do my taxes, but the extra forms add extra costs for what would otherwise be simple. In short, in these days of Roth IRAs, “back door” Roth contributions, Roth 401Ks and 403bs, etc. etc., I do not recommend making non-deductible contributions to a traditional IRA if you can help it. The form 8606 requirement is like taking any number and dividing it in half; it gets smaller toward infinity but never becomes 0. I’d love to rid myself of this requirement for 1% of my IRA since I paid income tax on the money in the 1980s. Other than a complete Roth conversion ($), any hints?
