Non-deductible contributions to a Traditional IRA come back out partly tax-free and partly taxable. The portion representing money you already paid tax on (your basis) is not taxed again. The earnings that money generated are taxed as ordinary income. You do not get to choose which dollars leave the account first; the IRS treats every distribution as a proportional mix of both, using a formula called the pro-rata rule.
The Two Buckets Inside Your IRA
Every Traditional IRA that has received non-deductible contributions contains two kinds of money. The first is your basis: the running total of every non-deductible dollar you have ever contributed. Because those dollars were taxed before they went in, the IRS lets you recover them without paying tax a second time.
The second bucket is everything else. Deductible contributions, pre-tax rollovers from a 401(k), and all the growth inside the account (interest, dividends, and appreciation) have never been taxed. When any of that money comes out, it is taxed as ordinary income at your regular rate.
If you take a distribution before age 59½, the taxable portion also faces a 10% early withdrawal penalty unless you qualify for an exception.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions The tax-free portion of the withdrawal is not subject to the penalty.
The Pro-Rata Rule
Here is where most people expect to be able to say “just give me my after-tax money back.” You cannot. Every distribution is treated as a proportional slice of the whole account, and the pro-rata formula sets the split:
Non-Taxable Portion = (Total Basis ÷ Total Value of All Non-Roth IRAs) × Amount Withdrawn
“Total value” is measured on December 31 of the distribution year, plus any distributions you took during the year and any outstanding rollovers.
An example makes it concrete. You have $20,000 of non-deductible basis. Your combined non-Roth IRA balances are worth $250,000 at year-end. Your basis is 8% of the total. If you withdraw $10,000, then 8% of that withdrawal ($800) is tax-free. The other $9,200 is taxable ordinary income.
Your basis is not gone after that withdrawal. It drops by the $800 you recovered, leaving $19,200 to carry forward. Every future distribution chips away at basis a little at a time, in the same proportional way, until it eventually reaches zero.
Which Accounts Get Pooled Together
The pro-rata calculation does not look at each IRA individually. The IRS aggregates all of your non-Roth IRAs into one pool for this purpose. That includes:
- Traditional IRAs, whether funded with deductible or non-deductible contributions
- Rollover IRAs holding money from a former employer’s plan
- SEP IRAs
- SIMPLE IRAs
These accounts are not part of the aggregation:
- Roth IRAs
- Employer plans such as 401(k), 403(b), and 457(b) accounts
- Inherited IRAs, in most cases
- Your spouse’s IRAs (each spouse calculates basis separately)
Aggregation matters because a large pre-tax balance dilutes your basis percentage. Say you have $20,000 in non-deductible contributions in one IRA and a $200,000 rollover IRA from a former 401(k) sitting alongside it. Your basis is roughly 9% of the combined balance, so 91% of every dollar you withdraw is taxable, no matter which account the check comes from. You cannot isolate the after-tax IRA and drain it separately.
Tracking and Proving Your Basis on Form 8606
IRS Form 8606, Nondeductible IRAs, is the only official record of your basis.2Internal Revenue Service. About Form 8606, Nondeductible IRAs You are required to file it for every year you make a non-deductible contribution (even if you owe no tax and are not otherwise filing a return), and for any year you take a distribution while you still have basis on the books.3Internal Revenue Service. Instructions for Form 8606
The form keeps a running total. Each year adds new non-deductible contributions to the cumulative basis from prior years. When you take a distribution, Form 8606 walks you through the pro-rata math and reduces the basis by whatever portion you recovered. The reduced number carries forward to the next year.
Skip the form and you have a problem. Without a documented Form 8606, you have no proof that any of your contributions were non-deductible. The IRS can treat your entire IRA balance as pre-tax money and tax every dollar of every withdrawal. The burden of proof sits with you, so keep copies of every Form 8606 you have filed along with the Form 5498 statements your custodian sends each year confirming contributions.
If you find you never filed Form 8606 for a past year in which you made a non-deductible contribution, you can still fix it. The cleanest route is to file an amended return (Form 1040-X) for each missed year with the corresponding Form 8606 attached, which creates a clear paper trail if the record is ever questioned.
How the Withdrawal Shows Up on Your Tax Return
Your IRA custodian will send you Form 1099-R for the year of the distribution.4Internal Revenue Service. About Form 1099-R Box 1 shows the gross amount withdrawn. Box 2a is supposed to show the taxable amount, but for Traditional IRAs with non-deductible basis, custodians generally do not compute it. They have no way to track basis across all of your aggregated accounts, so Box 2a will typically match Box 1 or be left blank with the “Taxable amount not determined” box checked.5Internal Revenue Service. Instructions for Forms 1099-R and 5498
The real tax calculation happens on Form 8606, which you attach to your 1040. Part I takes your running basis, the December 31 fair market value of all your non-Roth IRAs, and the amount distributed, then applies the pro-rata formula. Subtract the non-taxable portion from the gross distribution and the difference lands on the “IRA distributions – taxable amount” line of your 1040. Without Form 8606 attached, the IRS defaults to the full 1099-R amount being taxable.
Required Minimum Distributions Follow the Same Rule
Once you reach the age when required minimum distributions begin, the pro-rata rule still governs. You cannot instruct your custodian to satisfy the RMD from your non-deductible basis alone. Each mandatory distribution is split between taxable and non-taxable money in the same proportion as any other withdrawal.
If your basis is small relative to the total (say $20,000 of basis against a $500,000 balance), only about 4% of each RMD comes out tax-free, and it will take many years of required distributions to recover the full basis. For some savers, converting Traditional IRA money to a Roth before RMDs begin can recover basis faster than waiting to bleed it out through decades of mandatory withdrawals, though a conversion has its own tax cost in the year it happens.