How to Figure the Taxable Amount of an IRA Distribution

To figure the taxable amount of an IRA distribution, start with what is in the account. If your Traditional, SEP, or SIMPLE IRA holds only pre-tax contributions and their earnings, every dollar you withdraw is taxable as ordinary income.¹ If any part of the account came from after-tax (non-deductible) contributions, federal law forces you to treat each withdrawal as a proportional mix of taxable and non-taxable money, and you calculate that mix on Form 8606. Roth IRAs follow a separate ordering system rather than a pro-rata formula.

The Default: Fully Taxable Traditional IRA Withdrawals

Most Traditional IRA contributions are deductible in the year they are made, and most SEP and SIMPLE IRA money comes in pre-tax through an employer or salary reduction. If that describes every dollar in the account, the taxable amount equals the gross withdrawal. No allocation is needed.²

Your custodian confirms this on Form 1099-R. Box 1 shows the gross distribution and Box 2a shows the taxable amount, and for an all-pre-tax account those two figures should match.³ You carry the Box 2a figure to your Form 1040 and the calculation ends there.

Everything that follows applies when the account is not entirely pre-tax, or when the withdrawal qualifies for special treatment.

Basis: The Number That Changes the Math

Basis is the running total of every non-deductible contribution you have ever made to any Traditional, SEP, or SIMPLE IRA, reduced by any basis you have already recovered in prior distributions.⁴ Only basis comes back out tax-free; the rest of the account, including all earnings, is taxable when withdrawn.

The IRS requires Form 8606 in every year you make a non-deductible contribution, and Line 2 of the form carries forward your total basis from prior years.⁵ That is a small cost compared with paying income tax a second time on the same dollars.

The Pro-Rata Calculation for Mixed IRAs

When an IRA contains both pre-tax and after-tax money, you cannot withdraw only the after-tax portion. Every distribution is treated as a proportional slice of the whole, taxable and non-taxable together, under 26 USC §408(d)(2).¹

All Your IRAs Count as One

For this calculation, every Traditional, SEP, and SIMPLE IRA you own is treated as a single account, no matter how many accounts you hold or where they sit.¹ You cannot isolate after-tax money in one IRA to get a tax-free withdrawal from that account. Rolling a pre-tax 401(k) balance into an IRA changes the ratio, because those dollars join the aggregated pool and shrink your basis percentage.

The Formula

The non-taxable share of a distribution is your total basis divided by the total value of all your aggregated IRAs. That total value is the balance on December 31 of the distribution year plus all distributions taken during the year.¹

A worked example: you have $20,000 of total basis across your Traditional IRAs. On December 31, the combined balance is $180,000, and during the year you took a $10,000 distribution. The denominator is $180,000 plus $10,000, which is $190,000. Your non-taxable percentage is $20,000 ÷ $190,000, about 10.53%. Of the $10,000 withdrawn, $1,053 is a tax-free return of basis and $8,947 is taxable ordinary income.

The $1,053 you recovered reduces your remaining basis to $18,947 going forward. You report that new basis on Form 8606 filed with your return. The same math governs a required minimum distribution as a voluntary one.

Reporting the Number on Your Return

After a distribution year, your custodian issues Form 1099-R. Box 1 is the gross distribution, Box 2a is the taxable amount the custodian believes applies, and Box 7 carries a code identifying the distribution type.³

For an all-pre-tax account, Box 2a is the answer. When you have basis, the custodian usually cannot compute the correct taxable amount, because it does not see your other IRAs or your lifetime contribution history. Box 2a often shows the full distribution or is left blank in that situation. Form 8606 is where you actually do the pro-rata calculation. Line 2 carries your total basis, Line 6 takes the combined year-end value of your Traditional IRAs, and Line 7 captures your total distributions for the year.⁴ The taxable figure you produce on Form 8606 overrides whatever Box 2a says. You are the one on the hook for reporting the right number.

Default Withholding Is Not Your Final Tax

Custodians usually withhold 10% of a distribution for federal income tax unless you choose a different rate or opt out. That is an estimate. If your bracket is higher, you owe more when you file; if basis makes the taxable amount smaller than the gross distribution, you may see a refund. Adjusting the election at the time of the withdrawal can prevent a surprise.

Roth IRAs Use a Different System

Roth withdrawals do not use pro-rata. Instead, money leaves the account in a fixed order under the Roth ordering rules.⁶

Regular contributions come out first. Always tax-free and penalty-free, at any age, at any time. You already paid tax on this money.
Conversions and rollovers come out next, first-in-first-out. The principal of a conversion is not taxed again, but the 10% early-withdrawal penalty can apply if you are under 59½ and the conversion has not yet met its own five-year clock.
Earnings come out last. They are tax-free and penalty-free only if the distribution is qualified.

Qualified Roth Distributions

A distribution is qualified when your first Roth IRA contribution was made at least five tax years earlier and one of these applies:⁶

You are at least 59½.
You are disabled.
You are a beneficiary withdrawing after the owner’s death.
The distribution funds a qualified first-time home purchase, up to a $10,000 lifetime limit.

If none of that applies, earnings are ordinary income and, if you are under 59½, hit the 10% penalty as well.

Two Five-Year Clocks

The five-year rules trip people up because there are two clocks. The first starts January 1 of the year you first contributed to any Roth IRA and, once it finishes, never resets. That clock governs whether earnings can come out tax-free. The second attaches to each conversion separately, starting January 1 of the year of that conversion. Withdrawing converted amounts before that clock ends can trigger the 10% penalty on the taxable part of the conversion if you are under 59½. After 59½, the conversion clock stops mattering for the penalty.

Adjustments That Change the Taxable Amount

The 10% Early-Withdrawal Addition

Take a Traditional IRA distribution before 59½ and the taxable portion generally carries an extra 10% tax on top of ordinary income tax.² SIMPLE IRA withdrawals within the first two years of participation carry a 25% penalty instead of 10%.⁷

Several exceptions remove the penalty. The distribution is still taxable as ordinary income; only the 10% addition goes away. Commonly used exceptions include:⁷

Total and permanent disability of the IRA owner.
A series of substantially equal periodic payments under IRS-approved methods (72(t) distributions).
Unreimbursed medical expenses above 7.5% of adjusted gross income.
Health insurance premiums paid after receiving unemployment compensation for at least 12 weeks.
Qualified higher education expenses.
A first-time home purchase, up to a $10,000 lifetime limit.
Birth or adoption expenses, up to $5,000 per child.
Federally declared disaster losses, up to $22,000.
Domestic abuse victim distributions, up to the lesser of $10,000 or 50% of the account, for distributions after December 31, 2023.
One emergency personal expense distribution per year, up to the lesser of $1,000 or the vested balance above $1,000, for distributions after December 31, 2023.
Terminal illness, with no dollar limit, when a physician certifies death is expected within 84 months.

Exceptions are reported on Form 5329. If your 1099-R already carries the correct code in Box 7 and the penalty applies to the full distribution, you can sometimes report the additional tax directly on Schedule 2 of Form 1040 without filing Form 5329 separately.⁸

Qualified Charitable Distributions

If you are at least 70½ on the day of the distribution, you can send money directly from your Traditional IRA to a qualifying charity as a qualified charitable distribution, and the transferred amount is excluded from gross income entirely.⁹ The 2026 annual limit is $111,000 per person, or $222,000 for a married couple filing jointly where each spouse has an IRA.

Because a QCD is excluded from income, the pro-rata rule does not touch it. It also counts toward your required minimum distribution for the year without adding to taxable income. The money must move directly from the custodian to the charity; if the funds pass through your hands, the exclusion is lost.

What It Costs to Get the Calculation Wrong

Two penalties are worth planning around. Missing Form 8606 in a year you made a non-deductible contribution costs $50 per missed form, waivable for reasonable cause.¹⁰ The larger cost is losing the paper trail to prove your basis later.

Understating IRA income can also trigger the 20% accuracy-related penalty on the resulting tax underpayment. It applies when the understatement stems from negligence or exceeds the greater of 10% of the tax that should have been reported or $5,000.¹¹ Between the extra tax, interest, and the penalty itself, a pro-rata mistake compounds quickly.

1
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
2
Internal Revenue Service. Retirement Plans FAQs Regarding IRAs Distributions
3
Internal Revenue Service. Instructions for Forms 1099-R and 5498
4
Internal Revenue Service. Instructions for Form 8606
5
Internal Revenue Service. About Form 8606, Nondeductible IRAs26 USC 6693 – Failure to Provide Reports on Certain Tax-Favored Accounts or Annuities
6
GovInfo. 26 USC 408A – Roth IRAs
7
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
8
Internal Revenue Service. Instructions for Form 5329
9
Internal Revenue Service. Seniors Can Reduce Their Tax Burden by Donating to Charity Through Their IRA
10
Office of the Law Revision Counsel. 26 USC 6693 – Failure to Provide Reports on Certain Tax-Favored Accounts or Annuities
11
Internal Revenue Service. Accuracy-Related Penalty