The Overlooked IRS Forms That Can Keep Your IRA on Track

Special forms you may need for tax return filing

For many IRA owners and beneficiaries, tax season involves more than reviewing income, deductions, or investment activity. Certain retirement-related tax forms, specifically IRS Forms 5329 and 8606, can play a major role in ensuring you pay the correct amount of tax, avoid penalties, and maintain an accurate long-term record of your IRA basis. These forms are not issued by STRATA Trust Company the way Forms 1099‑R and 5498 are; instead, they must be filed directly by taxpayers under specific circumstances. Understanding when these forms apply is essential for protecting your tax advantages and staying compliant with IRS rules.

IRS Form 5329: Additional taxes

IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, serves two main purposes:

1. reporting certain tax penalties, and
2. claiming penalty exceptions that are not automatically communicated to the IRS.

While the form contains multiple sections, two are most commonly used by IRA owners.

Part I: Additional tax on early distributions

A 10% early distribution penalty generally applies to taxable IRA withdrawals made before age 59½. Custodians, including STRATA, report distributions using IRS codes that indicate whether a known exception applies. For example, beneficiary distributions are typically coded as death distributions using code 4, which tells the IRS that no early withdrawal penalty applies.

But when an exception is not known to the custodian, it is the taxpayer’s responsibility to file Form 5329 to claim that exception.

Example:
A 40‑year‑old IRA owner takes a distribution due to disability. If the custodian reports the withdrawal as code 1—early distribution, no known exception, the IRS will assume the 10% penalty applies unless Form 5329 is filed to claim the disability exception. Supporting documentation should be retained in case the IRS requests verification.

If you choose not to claim an exception and simply pay the penalty, filing Form 5329 is typically unnecessary. In this case, the penalty is reported by adding the amount owed to line 8 of Schedule 2 (“Additional Taxes”) and to Form 1040, Line 23 (“Other taxes”). (See Form 1040 instructions for details.)

Part IX: Additional tax on excess accumulation

This section applies when an IRA owner or beneficiary fails to take a required minimum distribution (RMD) by the deadline. The penalty, formerly 50% of the missed amount, has been reduced to 25% and may be further reduced to 10% if the error is corrected promptly. Filing Form 5329 is required whenever this penalty applies, even when the taxpayer is requesting a reduced penalty.

At a glance: Form 5329 is required when an IRA owner or beneficiary needs to:

1. Report or claim an exception for early withdrawal penalties on IRA distributions not correctly coded on Form 1099‑R.
2. Report a missed RMD and calculate or request a waiver of the associated excise tax.
3. Report and pay penalties on excess IRA contributions, including carryover amounts from prior years.
4. Report non-qualified Roth IRA distributions or Roth distributions requiring additional tax calculations.
5. Report nondeductible Traditional IRA activity or conversions when they trigger additional taxes.

IRS Form 8606: Reporting nondeductible IRA activity

Form 8606 is one of the IRS’s most frequently overlooked tax forms, yet it is essential for anyone who makes nondeductible contributions to a Traditional IRA, completes a Roth conversion, or takes certain types of Roth IRA distributions. The form establishes and tracks your after-tax basis in Traditional IRAs—a record the IRS does not track for you.

If you make an after-tax contribution to a Traditional IRA, you must file Form 8606 for that tax year to establish that nondeductible basis. You must also file the form for any year you take a distribution from any Traditional, SEP, or SIMPLE IRA, regardless of where the assets are held. This ensures that dollars already taxed are not taxed again.

A key rule often misunderstood:
You cannot withdraw or convert only your nondeductible contributions. All IRA balances—across all Traditional, SEP, and SIMPLE IRAs—are aggregated for tax purposes. Any distribution is treated as a proportional blend of pre-tax and after-tax funds. This frequently surprises taxpayers who assume they can simply isolate or return their after-tax contributions.

This rule is especially important for those using a back-door Roth IRA strategy. If you hold large pre-tax IRA balances, the pro‑rata formula may cause more of your conversion to be taxable, reducing the strategy’s overall tax efficiency.

At a glance: Form 8606 is required:

• To report nondeductible contributions to Traditional IRAs (and track the basis for future distributions)
• To report conversions from a Traditional IRA to a Roth IRA
• To report non-qualified distributions from a Roth IRA

Don’t overlook these important IRS forms

Failing to file Forms 5329 or 8606 when required can lead to unnecessary taxes, penalties, or long‑term recordkeeping challenges. Because STRATA cannot provide tax advice, IRA owners and beneficiaries should consult a qualified tax professional for guidance specific to their situation. You can also access helpful self‑service tools and educational materials in the IRS Reporting section of the STRATA Knowledge Center to better understand your filing responsibilities