You Could Be Paying Taxes Twice on Your Retirement Accounts
When it comes to IRAs, most Americans assume the rules are straightforward: put money in, let it grow, and pay taxes when you take it out. But there’s a quiet mistake that costs thousands in retirement—paying taxes twice on the same dollars.
It happens more often than most people realize. The issue centers around after-tax contributions made to traditional IRAs and the failure to track them properly using a form many overlook: IRS Form 8606.
What Are After-Tax IRA Contributions?
Most people think of traditional IRAs as tax-deferred accounts: you get a deduction now, and pay income taxes later. But higher-income earners who are covered by a workplace retirement plan often lose the ability to deduct IRA contributions due to IRS income limits. They may still contribute, but those dollars go in after-tax.
The IRS expects you to track that distinction. If you don’t, it treats every dollar you withdraw in retirement as fully taxable—even the part you already paid tax on.
The Role of IRS Form 8606
Form 8606 exists to document your non-deductible contributions and to calculate the taxable and non-taxable portions of IRA distributions later on. It’s not optional; it’s the only paper trail the IRS accepts to prove you already paid taxes on a portion of your contributions.
If you don’t file it when required, you could face:
Double taxation on your non-deductible contributions.
A $50 penalty for failing to file the form (per missed year), plus interest.
Administrative headaches when trying to correct mistakes after distributions begin.
A Quick Example
Let’s say over the years, you contributed $40,000 in after-tax dollars to your traditional IRA. At age 65, you begin withdrawing from the account, which has now grown to $150,000.
If Form 8606 was never filed, the IRS has no way of knowing any part of that $150,000 isn’t taxable. Without documentation, the entire withdrawal amount is treated as ordinary income—even though you already paid tax on $40,000 of it.
The result? You pay tax on the same income twice.
Can You Fix It?
Yes, but it takes some paperwork. If you missed filing Form 8606 in previous years, the IRS does allow retroactive filings. You’ll need accurate contribution records, and ideally a tax professional familiar with the process.
However, the longer the error goes uncorrected, the more complicated the fix becomes. This is especially true if you’ve already started taking distributions or rolled your IRA into other accounts.
Brokerages Don't Track It For You
Another common misconception: your IRA provider will track your basis. They won’t. While custodians report annual contributions to the IRS, they don’t separate deductible from non-deductible, nor do they track your lifetime after-tax basis. That responsibility falls on the individual.
Why This Matters Now
As more Americans build retirement wealth outside of employer plans and reach contribution limits on Roth IRAs, non-deductible IRA contributions are becoming more common—especially among middle- and upper-income households. The problem is, the tax reporting hasn't kept up.
Additionally, strategies like the Backdoor Roth IRA—which begins with a non-deductible contribution to a traditional IRA—depend entirely on accurate 8606 filings. Without it, you risk both taxes and IRS scrutiny.
Control your controllables
You can’t control how markets perform or where tax brackets will go, but you can control how accurately your retirement savings are tracked and taxed. Ensuring Form 8606 is filed correctly may not sound exciting, but it could save you thousands of dollars and avoid a logistical mess in your 70s.
This is one of those quiet corners of the tax code where doing the boring work—on time and correctly—makes all the difference
