The IRAs Anyone Can Open — and How They Actually Show Up on Your Tax Return

Before we get into the tax forms, let’s break down what these accounts actually are.

A Traditional IRA and a Roth IRA both exist because the government gives them special tax perks that help your money grow faster than if you used a normal investment account.

A Traditional IRA is basically the “save taxes now, pay later” option.
A Roth IRA is the “pay taxes now, enjoy tax-free money later” option.

Both IRAs are just containers you put investments into — not investments themselves. And the best part? You can open one at places like Fidelity, Vanguard, or Schwab in about ten minutes.

Which One Should You Pick?

Choose a Traditional IRA if:

• You want a tax deduction this year
• You want to reduce this year’s taxable income
• Your income is high right now and you’re okay paying taxes on withdrawals later

(Important note: whether you get the deduction depends on whether you have a 401(k) at work — we’ll explain this clearly in the next section.)

Choose a Roth IRA if:

• You want tax-free money later
• You’re earlier in your career or expect strong long-term investment growth
• You don’t want to guess future tax rates
• You think taxes will go up over time

There’s no wrong choice.
My personal take: having both gives you flexibility — just be very mindful not to over-contribute, because both IRAs share the same annual limit.

How These Accounts Show Up on Your Tax Return

When you PUT money in:

• Traditional IRA contributions might give you a tax deduction
• Roth contributions never do
• Your brokerage sends you a Form 5498 in May showing your contributions
• You do NOT file Form 5498 with your taxes. (It lets you know big brother is watching and has made a note of it.)

When you TAKE money out:

• You receive a 1099-R
• This form does go on your tax return as income
• Traditional IRA withdrawals are usually taxable
• Roth IRA withdrawals can be tax-free if you follow the rules

Quick summary for your brain:
5498 = IRS receipt
1099-R = taxable event

Important Note Before We Go Further

Here’s an Important Pikachu Face Issue: A Traditional IRA doesn’t always give you a tax deduction.
If your income is high and you already have a 401(k) (or similar plan) at work, your deduction may be reduced or eliminated — which means part or all of your contribution becomes non-deductible.

If you do not have a 401(k), your Traditional IRA contribution is usually fully deductible regardless of income.

We’ll explain exactly how this works below.

Form 8606 — Tracking After-Tax Money So You Don’t Get Taxed Twice

Form 8606 exists for one reason: to track money in your Traditional IRA that you’ve already paid taxes on, so the IRS doesn’t tax you again later.

When does Form 8606 come into play?

• When your Traditional IRA contribution is non-deductible
• When you convert money from a Traditional IRA to a Roth IRA
• When you withdraw certain Roth funds early
  

What is a non-deductible contribution?

It’s money you put into a Traditional IRA but can’t deduct because:

• your income is high
  and
• you’re covered by a 401(k) or other workplace retirement plan.

That money becomes your basis — meaning you already paid taxes on it.

Example (super simple):

• You put $6,000 into a Traditional IRA
• You earn too much and you’re covered by a 401(k)
• You’re not allowed to deduct it
  → The $6,000 becomes a non-deductible (after-tax) contribution
  → Years later, your account grows
  → When you withdraw money:
  • the original $6,000 should be tax-free
  • only the growth is taxable
    → Form 8606 keeps track so you don’t get taxed twice

Important clarification:

A Roth contribution is not the same thing as a non-deductible Traditional IRA contribution.
People mix these up all the time.

Warnings and Pitfalls

IRAs are simple, but here are a few things to watch out for:

• The IRS has strict yearly contribution limits. Putting in even a little too much triggers a 6% penalty every year until you fix it.
• The limit applies to both accounts combined — your Traditional and Roth share the same annual bucket.
• If you ever make a non-deductible Traditional IRA contribution, you must file Form 8606. It tells the IRS the money was already taxed so they don’t tax it again later.

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