How to Calculate Untaxed Portions of IRA Distributions

To calculate the untaxed portion of an IRA distribution, divide your total after-tax basis by the combined year-end value of all your Traditional, SEP, and SIMPLE IRAs (plus the distribution itself), then multiply that ratio by the amount you withdrew. The result is the tax-free return of basis. Everything else in the withdrawal is ordinary taxable income. The math is a single ratio, but the inputs are strict: the IRS treats every one of your Traditional-style IRAs as a single pool, and the value in the denominator is measured on December 31, not the day you took the money out.¹

What Counts as Basis

Basis is the running total of contributions you made with money that had already been taxed. When you contributed to a Traditional IRA and could not deduct the contribution (usually because your income was too high and you were covered by a workplace plan), those dollars went in post-tax. The IRS lets that money come back out tax-free. Deductible contributions and all earnings are pre-tax and fully taxable on distribution.¹

Your cumulative basis lives on Form 8606. Each year you make a non-deductible contribution, you file Form 8606 with your return, and the form carries the running basis total forward year after year.² That prior-year figure is the starting point for the calculation whenever you take a distribution.

The Pro-Rata Rule and What Gets Aggregated

You cannot pull only your after-tax dollars out and leave the pre-tax dollars behind. Every distribution is treated as coming proportionally from both. This is the pro-rata rule, and it applies no matter how many separate accounts you hold or which specific account the withdrawal came from.¹

For the denominator, the IRS aggregates all of your Traditional, SEP, and SIMPLE IRA balances into one number. Five accounts at three brokerages still equal one pool. Roth IRAs are separate. Employer plans such as 401(k), 403(b), and 457 balances are not included in the aggregation.³

The value used in the denominator is the December 31 total for the year you took the distribution, plus the distribution itself. A withdrawal in January gets measured against a balance recorded nearly twelve months later. If your accounts grow during the year, the ratio shrinks and less of your distribution comes back tax-free. Mid-year, you can only estimate.¹

The Calculation, Line by Line

IRS Publication 590-B provides Worksheet 1-1, and Form 8606 walks through the same steps. Work through them in order:³

Enter your prior-year basis, carried forward from last year’s Form 8606.
Add any non-deductible contributions you made for the current tax year.
Add the first two lines. This is your total basis and the numerator of your ratio.
Enter the December 31 value of all your Traditional, SEP, and SIMPLE IRAs, including any outstanding rollovers.
Enter total distributions received during the year, including Roth conversions and qualified charitable distributions.
Add lines 4 and 5. This is the denominator.
Divide line 3 by line 6, rounded to at least three decimal places. Cap the result at 1.000.
Multiply line 5 by line 7. That is your tax-free return of basis.

Subtract the tax-free amount from the total distribution and you have the taxable portion.

A Worked Example

Suppose your cumulative basis is $15,000, your year-end IRA balances total $135,000, and you took a $10,000 distribution during the year. The denominator is $135,000 plus $10,000, or $145,000. The ratio is $15,000 ÷ $145,000, which rounds to 0.103. Multiply $10,000 by 0.103 and you get $1,030 of tax-free return of basis. The remaining $8,970 is ordinary taxable income. Your remaining basis drops to $13,970 and carries forward on next year’s Form 8606.

Another one, for scale. Basis of $20,000 against a pooled balance of $200,000 produces a 10% tax-free ratio. On a $30,000 withdrawal, $3,000 comes back tax-free and $27,000 is taxable. Notice that the basis in the account decreases in proportion to the withdrawal, so your ratio in future years depends on how the remaining basis compares to future balances.

Why You Cannot Rely on the 1099-R

Your custodian sends Form 1099-R for the distribution. Box 1 shows the gross amount. Box 2a, the “taxable amount,” is frequently marked “unknown” or set equal to the full distribution because the custodian has no way to know your basis. That figure is not the answer.⁴

You produce the correct taxable amount on Form 8606, which runs the pro-rata calculation and outputs both the taxable and non-taxable figures. The taxable number then flows to your Form 1040. Entering Box 2a straight from the 1099-R without running the worksheet means paying tax on money you already paid tax on once before.⁵

If You Are Under 59½

The 10% early withdrawal penalty applies only to the taxable portion of a distribution, not to the return of your basis.⁶ In the $10,000 distribution example above, the penalty would be 10% of $8,970, or $897, not $1,000. You report the penalty on Form 5329 unless an exception applies.

If You Never Tracked Basis

Without Form 8606 on file, the IRS has no record that any of your contributions were after-tax, and the entire distribution can be treated as fully taxable. If you missed filing in past years, you have two paths. The thorough one is to amend the affected returns with Form 1040-X and attach the missing Form 8606 for each year. A lighter approach some practitioners use is to mail a standalone Form 8606 for the missed year with a short cover letter. Either way, you will need old tax returns and contribution records to reconstruct which contributions were deductible and which were not.

The straight penalty for a missed Form 8606 is $50 per year, and reasonable cause can excuse it.⁷ The larger cost is the tax you overpay on distributions if you cannot substantiate basis.

Situations That Change the Math

Roth Conversions

A Roth conversion counts as a distribution for pro-rata purposes. The same ratio applies. If you have $7,500 of basis from a non-deductible contribution and $92,500 of pre-tax money sitting in a rollover IRA, converting the $7,500 does not give you a tax-free conversion. Total basis is $7,500, total pool is $100,000, non-taxable ratio is 7.5%. Only $562 of the conversion is tax-free; $6,938 is taxable.

The common workaround is to move the pre-tax rollover balance into an employer 401(k) before converting, because employer plans sit outside the IRA aggregation. Not all 401(k) plans accept incoming rollovers, so confirm with the plan administrator first.

Qualified Charitable Distributions

If you are 70½ or older, a qualified charitable distribution sending money directly from your IRA to an eligible charity is excluded from gross income entirely, up to $111,000 in 2026, and each spouse in a married couple can make a separate QCD up to that limit.³ QCDs are treated as coming from the taxable portion first, which leaves your basis in the account and increases the tax-free percentage of later ordinary distributions.

Inherited IRAs

Basis carries over to a beneficiary who inherits a Traditional IRA that held non-deductible contributions. A non-spouse heir must track that inherited basis on a separate Form 8606, kept apart from any basis in their own IRA contributions or from IRAs inherited from another person.⁵ A surviving spouse who elects to treat the inherited account as their own is the exception: the basis merges with their existing basis, and the standard aggregation and pro-rata calculation applies to the combined pool going forward.

1
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
2
Internal Revenue Service. About Form 8606, Nondeductible IRAs
3
Internal Revenue Service. Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs)
4
Internal Revenue Service. Instructions for Forms 1099-R and 5498
5
Internal Revenue Service. Instructions for Form 8606 Nondeductible IRAs
6
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
7
Office of the Law Revision Counsel. 26 USC 6693 – Failure to Provide Reports on Certain Tax-Favored Accounts or Annuities