IRA basis is after-tax money in traditional IRAs. Learn how Form 8606 tracks it and how the pro-rata rule affects withdrawals and conversions.
IRA basis is the portion of an individual retirement arrangement that has already been taxed and therefore generally should not be taxed again when distributed. In traditional, SEP, and SIMPLE IRAs, basis commonly comes from nondeductible traditional IRA contributions or after-tax amounts properly rolled into an IRA. Form 8606 tracks federal basis and its recovery.
IRA basis is a tax record, not the account balance, original purchase price of investments, or amount deposited into one particular IRA.
Basis can increase through a nondeductible contribution to a traditional IRA and certain after-tax rollovers. It can decrease when a distribution or Roth conversion returns a portion of that after-tax money under the Form 8606 calculation. Investment earnings do not create basis merely because they remain inside the account.
Deductible traditional IRA contributions are pretax and do not create basis. Regular Roth IRA contributions are also after-tax, but Roth distributions use a different ordering system; they are not combined with traditional IRA basis on Part I of Form 8606.
For married taxpayers, IRA ownership is individual. Spouses do not combine their basis or IRA balances, even on a joint return. Each spouse may need a separate Form 8606.
For federal purposes, a person's traditional IRAs, SEP IRAs, and SIMPLE IRAs are generally treated as one combined IRA when calculating the taxable portion of a distribution or Roth conversion. Basis is allocated proportionately between the year's distributions and the value remaining in the aggregated IRAs.
A simplified relationship is:
Tax-free percentage = total unrecovered basis ÷ total IRA value used by Form 8606
The actual form includes the December 31 value of all traditional, SEP, and SIMPLE IRAs, distributions during the year, conversions, and certain outstanding rollovers or recharacterizations. Use the form instructions rather than applying only a year-end account statement.
The rule prevents a taxpayer from pointing to one IRA funded with after-tax dollars and withdrawing only that account's "basis." Custodial labels and separate brokerage accounts do not override federal aggregation.
Jordan has $12,500 of basis carried forward and makes a $7,500 nondeductible traditional IRA contribution for 2026. Total basis is $20,000. Jordan converts $20,000 to a Roth IRA. For the Form 8606 calculation, the combined value of all traditional, SEP, and SIMPLE IRAs, including the relevant distribution amount, is $80,000.
The basis percentage is 25%: $20,000 divided by $80,000. Accordingly, $5,000 of the $20,000 conversion is generally a tax-free return of basis and $15,000 is generally taxable. After the conversion, $15,000 of basis remains to carry forward.
Market changes, other distributions, rollovers, conversions, and year-end values can change the actual Form 8606 result.
Form 8606 begins with prior-year basis, adds current nondeductible contributions, applies the pro-rata calculation when required, and reports basis carried to the next year. The taxable IRA distribution is then carried to Form 1040. Form 1099-R reports the gross distribution, but the payer often marks the taxable amount as undetermined because it does not know the taxpayer's other IRAs or basis history.
Form 5498 reports IRA contributions and year-end information but does not establish deductibility or cumulative basis. The taxpayer is responsible for retaining Form 8606.
If a taxpayer made nondeductible contributions but never filed Form 8606, the economic after-tax investment still requires substantiation. Reconstructing it may involve returns, Forms 5498, account statements, transcripts, and proof of which contributions were deducted.
An IRA may hold stocks with their own brokerage cost information, but sales inside a traditional IRA generally do not produce currently reported capital gains or losses. IRA basis applies to the retirement arrangement's distributions, not to each security's purchase price.
An $80,000 IRA can have $20,000 of tax basis even if its investments originally cost another amount. Conversely, an IRA can have no basis even after years of reinvestment if all contributions and earnings were pretax.
An eligible transfer of pretax IRA dollars into an employer plan that accepts rollovers may reduce the pretax IRA balance considered in a later pro-rata conversion calculation. The transaction must be allowed by the receiving plan and completed correctly. Investment options, fees, creditor protection, plan rules, timing, and outstanding distributions all matter.
After-tax amounts in employer retirement plans follow plan-distribution allocation rules that are related but not identical to IRA basis rules. Do not carry an employer plan's after-tax figure onto Form 8606 without confirming a valid rollover and the proper allocation.
Federal and California IRA basis are often the same, but not always. Differences can arise from contributions deducted on one return but not the other, prior residency, historical California nonconformity, rollovers, and previously taxed distributions. California Schedule CA and FTB Publication 1005 address adjustments when the taxable pension or IRA amount differs.
Maintain parallel federal and California basis schedules when a difference exists. Using only the current federal Form 8606 can overstate or understate California income.
Heath Income Tax can help trace prior contributions, reconcile Forms 8606, and calculate federal and California taxable distributions.
Does IRA basis expire?
No. Unrecovered basis generally carries forward until recovered, but the taxpayer must substantiate it.
Is my Roth IRA included in the pro-rata denominator?
No. Roth IRA balances are not aggregated with traditional, SEP, and SIMPLE IRAs for this calculation.
Can my spouse's IRA affect my pro-rata result?
No. Each spouse owns and calculates IRA basis separately.
The definitions and examples on this page are for informational purposes only and do not constitute tax advice. Tax laws change frequently and individual circumstances vary. Consult a qualified tax professional before making decisions based on this content.
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