IRA basis is the portion of your traditional IRA that was funded with after-tax dollars — money you’ve already paid income tax on. Tracking it matters because the IRS will otherwise treat every dollar you eventually withdraw as taxable income, and you’ll pay tax twice on the same money. Basis shows up in two common situations: when your income is too high to deduct your traditional IRA contribution, and when you use a backdoor Roth conversion. In both cases, a form called 8606 is what keeps the record straight.
How Basis Gets Into Your IRA
Most traditional IRA contributions are deductible, which means they go in pre-tax and reduce your current-year income. When that’s how the money went in, none of it is basis. Every dollar in the account is taxable on the way out.
Basis is created when you contribute to a traditional IRA but can’t take the deduction. That happens when your modified adjusted gross income exceeds the phase-out range and you or your spouse are covered by a workplace retirement plan. The IRS calls these “designated nondeductible contributions.”1Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts – Section: Definitions and Rules Relating to Nondeductible Contributions The money still goes into the IRA; it just goes in already taxed.
For 2026, the phase-out ranges for a taxpayer covered by a workplace plan are:
- Single or head of household: $81,000 to $91,000
- Married filing jointly, contributing spouse covered: $129,000 to $149,000
- Married filing jointly, contributing spouse not covered but other spouse is: $242,000 to $252,000
- Married filing separately: $0 to $10,000
Above the top of your range, none of the contribution is deductible.2Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 The 2026 contribution limit is $7,500, or $8,600 if you’re 50 or older.3Internal Revenue Service. Retirement Topics – IRA Contribution Limits
Basis can also come from rollovers. If your 401(k) held after-tax contributions (not Roth 401(k) money, but old-style after-tax contributions), those amounts become basis in the IRA that receives them. IRS guidance lets you direct the plan administrator to send the pre-tax portion to a traditional IRA and the after-tax portion to a Roth IRA in a single distribution, which avoids planting basis in the traditional account in the first place.4Internal Revenue Service. Guidance on Allocation of After-Tax Amounts to Rollovers Notice 2014-54
Once basis is in the account, it looks identical to every other dollar. Your custodian doesn’t separate it out. Your statement shows one balance. The only place the after-tax portion exists as a distinct number is on your own tax filings, which is why the paperwork matters as much as it does.
Form 8606: The Record That Proves It
Form 8606 is the running ledger of your after-tax IRA money. You file it with your tax return for every year you make a nondeductible contribution, convert a traditional IRA to a Roth, or take a distribution from a traditional IRA that contains basis.5Internal Revenue Service. About Form 8606, Nondeductible IRAs Line 1 records the current year’s nondeductible contribution, line 2 carries forward the total basis from prior years, and adding them gives the IRS your updated cumulative figure.6Internal Revenue Service. Form 8606 – Nondeductible IRAs (2025)
Skipping the form costs $50 per year missed. Overstating your nondeductible contributions costs $100 per occurrence. Both penalties can be waived for reasonable cause.7Office of the Law Revision Counsel. 26 USC 6693 – Failure to Provide Reports on Certain Tax-Favored Accounts or Annuities The dollar fines are minor. The real cost of not filing is losing your proof: without a documented basis, the IRS will tax every distribution in full, even the portion that came from after-tax money.
The IRS wants basis records kept until all distributions from your IRAs are complete, which for most people means keeping them for decades. Hold onto:
- Every Form 8606 you’ve filed, with supporting worksheets
- Form 5498, the annual IRA Contribution Information statement from your custodian
- Form 1099-R for every year you took a distribution
- Page 1 of Form 1040 for each year you made a nondeductible contribution
Together, these connect your contributions to the basis you eventually claim.8Internal Revenue Service. Instructions for Form 8606 (2025)
The Pro-Rata Rule
You might expect to withdraw just the after-tax dollars from your IRA and leave the taxable ones growing. Federal law doesn’t allow it. Every distribution from a traditional IRA is treated as a proportional mix of taxable and tax-free money, and all your traditional, SEP, and SIMPLE IRAs are treated as a single account for this purpose.9Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts – Section: Tax Treatment of Distributions This is the pro-rata rule.
The math: divide your total basis by the combined year-end value of all your non-Roth IRAs. That ratio is the tax-free percentage applied to every dollar you withdraw that year. Total balance of $100,000 with basis of $10,000 means 10% of any distribution is tax-free and 90% is taxable. It doesn’t matter how many separate IRAs you hold or which one you actually pull from. The IRS ignores account boundaries.
Underreporting the taxable portion of a distribution can trigger a 20% accuracy-related penalty on the underpayment.10Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
Why This Matters for a Backdoor Roth
The backdoor Roth is the most common reason basis tracking becomes urgent. High earners who can’t contribute to a Roth directly instead contribute to a traditional IRA on a nondeductible basis and then convert the account to a Roth. If the traditional IRA holds only that nondeductible contribution and little or no earnings, the conversion is mostly tax-free because the basis was already taxed going in.
The pro-rata rule can wreck this. Say you have $200,000 sitting in a rollover IRA from an old 401(k) alongside a $7,500 nondeductible contribution. Your basis ratio is roughly 3.6% ($7,500 divided by $207,500), meaning about 96% of any conversion amount is taxable. People who attempt a backdoor Roth without knowing about the pre-tax IRA balances end up with a large surprise tax bill.
The workaround is to roll pre-tax IRA balances into an employer 401(k) before converting. Balances inside a 401(k) don’t count in the pro-rata calculation, so removing the pre-tax money from your IRAs leaves only the nondeductible contribution behind. The conversion then generates little or no tax. This only works if your employer’s plan accepts incoming rollovers; not all do. Timing also matters, because the pro-rata calculation uses your total IRA value as of December 31 of the year you convert.9Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts – Section: Tax Treatment of Distributions Both the rollout to the 401(k) and the Roth conversion need to happen within the same calendar year.
Roth IRA Basis Works Differently
Roth IRAs don’t have the mixed-basis problem, because every contribution is after-tax from day one. Your entire contribution history is your basis. And Roth distributions follow ordering rules that are more generous than pro-rata treatment. Withdrawals come out in this sequence:11Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs – Section: Distribution Rules
- Regular contributions first. Always free of income tax and the 10% early withdrawal penalty, at any age.
- Conversion contributions next, first-in, first-out. The taxable portion of each conversion comes out before the non-taxable portion. Converted amounts withdrawn within five years of the conversion may trigger the 10% early withdrawal penalty if you’re under 59½.
- Earnings last. Fully taxable and subject to the 10% penalty unless the withdrawal is a qualified distribution, generally meaning you’re at least 59½ and the account has been open for at least five tax years.
The practical effect: you can pull Roth contributions at any time for an emergency without tax consequences. That kind of access doesn’t exist with traditional IRA basis, where every withdrawal forces a proportional split.
Inherited IRAs Carry Basis Too
When someone inherits a traditional IRA containing nondeductible contributions, the basis transfers to the beneficiary. The heir excludes a proportional share of each distribution from income, just as the original owner would have. The beneficiary files their own Form 8606, and if you inherit IRAs from more than one person, you file a separate Form 8606 for each decedent.8Internal Revenue Service. Instructions for Form 8606 (2025)
The practical difficulty is knowing the basis exists. Custodians don’t track basis, so the record only lives on the original owner’s tax filings. If you suspect an inherited IRA contained nondeductible contributions, request the decedent’s prior Form 8606 filings from the IRS or search their tax records. Without documentation, the IRS treats every distribution as fully taxable.
If You Never Filed Form 8606
If you made nondeductible contributions in past years and never filed the form, the basis isn’t permanently lost. You can file a standalone Form 8606 for each missed year to establish the record retroactively. If the original return had an error, file Form 1040-X with a corrected Form 8606 attached, provided you’re within the amendment window.12Internal Revenue Service. Instructions for Form 8606 (2025)
Reconstructing basis without the original paperwork is harder. Pull what you can from old Form 5498 statements, prior tax returns showing whether deductions were claimed, and Form 1099-R records. Your custodian may have historical contribution data going back many years. Tax return transcripts from the IRS can help, though they don’t reach back indefinitely.
The pattern that hurts people most is contributing for decades, skipping the form each year, and arriving at retirement unable to prove which dollars were after-tax. Filing Form 8606 every year the contribution happens is far easier than assembling the trail later under audit pressure.