IRA basis is the total after-tax money inside your Traditional, SEP, or SIMPLE IRA — dollars you already paid income tax on before they went in. Tracking that figure is how you avoid being taxed on the same money twice when you withdraw it. Basis is built mainly from nondeductible contributions and from after-tax dollars rolled in from a workplace plan, and it is reported to the IRS on Form 8606.1Internal Revenue Service. Instructions for Form 8606 (2025)
Most Traditional IRA dollars are fully taxable when you take them out, because they came from deductible contributions or from investment growth that has never been taxed. Basis is the slice the IRS has already collected on. Your right to recover it tax-free depends entirely on being able to prove it exists.2Internal Revenue Service. Burden of Proof
How Basis Gets Into a Traditional IRA
The most common source is a nondeductible contribution. When your income is high enough that you or your spouse cannot deduct a Traditional IRA contribution, the money still goes into the account, but the tax was paid on it first. That amount becomes basis the moment it lands in the IRA.3Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
The 2026 IRA contribution limit is $7,500, with an extra $1,100 catch-up if you are 50 or older. Whether any of that becomes basis depends on your filing status, whether you or your spouse is covered by a workplace retirement plan, and where your income falls in the deduction phase-out ranges.3Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
The second source is a rollover of after-tax contributions from a 401(k) or 403(b) into a Traditional IRA. The after-tax portion keeps its status and adds to your IRA basis; the pre-tax portion remains fully taxable on withdrawal.4Internal Revenue Service. Rollovers of After-Tax Contributions in Retirement Plans If you don’t document the after-tax amount at the time of the rollover, you can lose the ability to withdraw those dollars tax-free later.
Why Basis Matters: The Pro-Rata Rule
You cannot pull out just your after-tax money and leave the taxable balance alone. Federal tax law treats all of your Traditional, SEP, and SIMPLE IRAs as a single pool, and every distribution comes out as a proportional mix of pre-tax and after-tax dollars.5Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts This applies across every Traditional-type IRA you own, even if the accounts sit at different custodians.
The math: divide your total basis by the combined December 31 value of all your Traditional, SEP, and SIMPLE IRAs (adding back any distributions and conversions made during the year). The result is the nontaxable percentage of each dollar you withdraw.6Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs)
Say you have $20,000 of basis and your combined Traditional-type IRA balance is $200,000. Your nontaxable share is 10%. Withdraw $10,000, and only $1,000 comes out tax-free; the other $9,000 is ordinary income. The ratio gets recalculated every year, because contributions, market movement, and withdrawals all change it.
Roth IRAs and employer plans like 401(k)s are not part of this aggregation. Only Traditional, SEP, and SIMPLE balances count.
Tracking Basis on Form 8606
Form 8606 is how you tell the IRS you have basis and how much of it you have. You file it with your federal return for any year you make a nondeductible contribution, take a distribution from a Traditional IRA that contains basis, or convert Traditional IRA funds to a Roth.7Internal Revenue Service. About Form 8606, Nondeductible IRAs Part I tracks cumulative nondeductible contributions, Part II handles Roth conversions, and Part III covers distributions from accounts holding basis.1Internal Revenue Service. Instructions for Form 8606 (2025)
If your income is low enough that you don’t otherwise have to file a return, you still need to send in Form 8606 on its own for any year you made a nondeductible contribution. Sign it, include your address, and mail it to the IRS address where you would normally send your return.1Internal Revenue Service. Instructions for Form 8606 (2025)
Keep every Form 8606 you file, plus account statements and any rollover paperwork, for as long as you or a beneficiary holds the IRA. Proving that part of the account is nontaxable is your job, not the IRS’s.2Internal Revenue Service. Burden of Proof Without records, the IRS can treat your entire distribution as taxable.
Penalties and Fixing a Missed Filing
Skipping Form 8606 in a year you made a nondeductible contribution carries a $50 penalty unless you can show reasonable cause. Overstating your basis on the form runs $100 per overstatement, again subject to a reasonable-cause exception.8Internal Revenue Service. Publication 590-A (2025), Contributions to Individual Retirement Arrangements (IRAs) The dollar penalties are small. The real damage from missing the form is losing the documentation that keeps your later withdrawals partially tax-free.
If you missed filing in prior years, you can send in late Forms 8606 by attaching them to an amended return (Form 1040-X) for each year involved.1Internal Revenue Service. Instructions for Form 8606 (2025) Reconstructing the numbers usually means pulling old account statements, asking your custodian for contribution histories, and reviewing past returns to see which contributions were never deducted. It takes work. It also prevents much larger overpayments when the distributions start.
Backdoor Roth Conversions Turn on Basis
A backdoor Roth involves putting money into a Traditional IRA (often as a nondeductible contribution, because your income is too high for a direct Roth) and then converting to a Roth IRA. The conversion is taxable only to the extent it exceeds your basis.9Internal Revenue Service. Publication 590-A (2025), Contributions to Individual Retirement Arrangements (IRAs)
The pro-rata rule is what trips people up here. If you have any pre-tax money in any Traditional, SEP, or SIMPLE IRA, you can’t isolate the fresh after-tax contribution and convert only that. The taxable share of the conversion is based on the same pro-rata fraction that applies to any distribution. If 95% of your combined Traditional-type IRA balances are pre-tax and you convert $7,500, about $7,125 is taxable income, not just the earnings on your recent contribution. Every conversion gets reported on Part II of Form 8606.1Internal Revenue Service. Instructions for Form 8606 (2025)
Roth IRA Basis Works Differently
Direct Roth contributions are always after-tax, so Roth basis equals your total contributions. Roth IRAs don’t use the pro-rata rule. Instead, ordering rules apply: distributions come first from regular contributions (tax-free), then from converted amounts on a first-in, first-out basis, and finally from earnings.10eCFR. 26 CFR 1.408A-6 – Distributions
That means you can pull out up to the full amount of your Roth contributions at any time, at any age, without tax or penalty. Earnings withdrawn before age 59½ or before the account has been open five years may be taxable. Roth basis tracking is simpler than Traditional IRA basis, but it still matters if early withdrawals exceed what you contributed.
What Happens to Basis When You Die
Basis doesn’t disappear when the IRA owner dies. A beneficiary inherits the same right to recover those after-tax dollars tax-free.11Internal Revenue Service. Retirement Topics – Beneficiary The beneficiary files a separate Form 8606 to track the inherited basis apart from their own IRA basis, and if they inherit from more than one person, they need a separate 8606 for each decedent’s account.1Internal Revenue Service. Instructions for Form 8606 (2025) The pro-rata rule still governs inherited distributions, which is why accurate records from the original owner matter to the person who ends up with the account.