IRA Cost Basis: Form 8606, the Pro-Rata Rule, and Roth Conversions

The cost basis of an IRA is the total after-tax money you’ve put into your traditional, SEP, and SIMPLE IRAs over the years. It matters because every dollar of basis comes back to you tax-free when you take distributions, and every dollar you can’t prove as basis gets taxed as ordinary income even though you already paid tax on it once. The IRS puts the entire burden of proof on you, and the tracking mechanism is Form 8606.

What Creates Basis in a Traditional IRA

A contribution creates basis only when you don’t deduct it. If you claim the full deduction, the whole contribution is pre-tax and has zero basis; everything that comes out later is taxable.¹

Nondeductible contributions usually happen because your income is too high to qualify for the deduction. When you or your spouse are covered by a retirement plan at work and your Modified Adjusted Gross Income exceeds the IRS phase-out ranges, the deduction is reduced or eliminated. Any contribution above the top of your range is fully nondeductible, and the full amount becomes basis.²

After-Tax Rollovers From an Employer Plan

Some 401(k) and 403(b) plans allow after-tax contributions on top of regular salary deferrals. When you leave the employer and roll that after-tax money into a traditional IRA, it becomes part of your IRA cost basis immediately.³ The earnings on those after-tax contributions stay tax-deferred and are not basis. Box 5 of the Form 1099-R for the rollover shows the after-tax amount being moved.⁴

Roth IRAs

Basis tracking in the sense discussed here is a traditional, SEP, and SIMPLE IRA concern. Qualified Roth distributions come out tax-free, so there’s no need to separate basis from earnings on those withdrawals. Early or non-qualified Roth withdrawals follow their own ordering rules.

How Form 8606 Tracks Your Basis

Form 8606, “Nondeductible IRAs,” is the only mechanism the IRS recognizes for tracking IRA cost basis. You must file it in any year you make a nondeductible contribution to a traditional IRA, even if your income is low enough that you wouldn’t otherwise file a return. You also must file it in any year you take a distribution from a traditional, SEP, or SIMPLE IRA that contains basis.⁵

The form works as a running ledger. Part I records the current year’s nondeductible contribution and adds it to the basis carried forward from prior years. Each year’s ending balance becomes the next year’s opening balance, so every after-tax contribution you’ve ever made links into a single cumulative number.⁶ When you take a distribution or do a Roth conversion, the same Part I calculates how much comes out tax-free.

If you aren’t required to file a Form 1040 in a given year, file Form 8606 on its own. Sign it and mail it to the address where you’d send your 1040, by the same deadline including extensions.⁷

The IRS Doesn’t Track This for You

Your custodian reports contributions on Form 5498 and distributions on Form 1099-R, but neither form tells the IRS whether a contribution was deductible or nondeductible, and neither reports your cumulative basis.⁴ There is no central IRS database of IRA basis. If you take a distribution years from now and can’t produce a chain of Forms 8606, the IRS will treat the entire distribution as taxable.

Records to Keep

Keep these records until you’ve received every dollar from all your IRAs, which for most people means indefinitely:

Every Form 8606 you’ve ever filed, plus supporting worksheets
Page 1 of Form 1040 for each year you made a nondeductible contribution
Form 5498 statements from your custodian showing contributions and year-end account values
Form 1099-R for each year you took a distribution

Digital copies are fine. Back them up.

How Basis Comes Back to You: The Pro-Rata Rule

You can’t pick which dollars leave your IRA. The pro-rata rule forces every distribution to be a proportional mix of taxable and tax-free money:

Tax-Free Portion = (Total Basis ÷ Total Value of All Non-Roth IRAs) × Distribution Amount

“Total Basis” comes from your most recent Form 8606. “Total Value of All Non-Roth IRAs” is the combined fair market value of every traditional, SEP, and SIMPLE IRA you own on December 31 of the distribution year, plus any outstanding rollovers.⁷

The Aggregation Rule

The IRS treats all your non-Roth IRAs as a single pool for this calculation. Different custodians, different opening years, none of it matters. Say you have one IRA with $50,000 containing $10,000 of basis and another with $150,000 that’s all pre-tax. Your total is $200,000 with $10,000 of basis. If you withdraw $10,000 from the first account, the tax-free portion is ($10,000 ÷ $200,000) × $10,000, or $500. Only $500 comes out tax-free; $9,500 is ordinary income.³

After each distribution, your remaining basis drops by the tax-free amount you received, and the reduced number carries forward to next year’s Form 8606.

Basis in Roth Conversions

The pro-rata rule applies to Roth conversions the same way it applies to regular distributions. Moving money from a traditional IRA to a Roth is a taxable event, but the portion representing your basis converts tax-free.

Suppose you have $10,000 of basis across $100,000 in total traditional IRA assets and convert $50,000. The tax-free portion is ($10,000 ÷ $100,000) × $50,000, or $5,000. You owe income tax on $45,000; $5,000 converts with no tax. Every traditional, SEP, and SIMPLE IRA you own factors into the denominator, even accounts you aren’t converting. Part I of Form 8606 calculates the split, and Part II reports the taxable amount.⁵

The Backdoor Roth

High earners who can’t contribute directly to a Roth often make a nondeductible contribution to a traditional IRA and immediately convert it. Done with no other traditional IRA balances, the conversion is nearly or entirely tax-free because basis equals the amount converted.

The pro-rata rule is what makes or breaks this. If you have pre-tax money in any traditional, SEP, or SIMPLE IRA, the IRS won’t let you convert just the nondeductible piece. Someone with $92,500 of pre-tax IRA money who adds a $7,500 nondeductible contribution and tries to convert only that $7,500 will find that roughly 92.5% of the conversion is taxable. Some people roll their pre-tax IRA balances into an employer plan that accepts incoming rollovers before executing the conversion, leaving the traditional IRA holding nothing but the nondeductible contribution. If that setup works, Line 18 of Form 8606 Part II should show zero taxable income on the conversion.⁸

What Happens to Basis When Someone Dies

Basis doesn’t disappear at death. It carries over to the beneficiary and reduces tax on inherited distributions, which means beneficiaries need access to the decedent’s last Form 8606.⁹

A surviving spouse who treats the inherited IRA as their own can combine the inherited basis with their own basis. Any other beneficiary must keep inherited basis separate, and someone inheriting IRAs from multiple people files a separate Form 8606 for each decedent’s IRA.⁷ For any distribution taken in the year of death before the owner died, the pro-rata denominator uses the IRA value on the date of death rather than December 31.⁹

If You Missed Filings or Lost Records

The direct penalties are small. Failing to file Form 8606 in a year you were required to costs $50. Overstating your nondeductible contributions costs $100 per overstatement absent reasonable cause.⁷⁶ The real cost is losing basis you’re entitled to and paying tax again on money you already paid tax on.

Filing Late Forms 8606

If you made nondeductible contributions in past years and never filed the form, you can still file it retroactively. Prepare a Form 8606 for each missed year, using that year’s version if possible. If a missed nondeductible contribution should have changed a previously filed return, file Form 1040-X for that year with the corrected Form 8606 attached. Amended-return time limits generally apply, but filing a late Form 8606 to establish basis is better than losing the basis entirely.

Reconstructing What You Can

Start by requesting transcripts of prior tax returns from the IRS using Form 4506-T. Those transcripts may show whether you claimed an IRA deduction each year. Cross-reference against the Form 5498 statements from each custodian, which show contributions by year. Any year with a contribution but no deduction likely generated basis. Old bank statements, brokerage statements, and cancelled checks help fill in the timeline. The work is tedious. If it recovers $20,000 or $30,000 of legitimate basis, the tax savings usually justify the effort.

1
Internal Revenue Service. Topic No. 451, Individual Retirement Arrangements (IRAs)
2
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
3
Internal Revenue Service. Rollovers of After-Tax Contributions in Retirement Plans
4
Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025)
5
Internal Revenue Service. About Form 8606, Nondeductible IRAs
6
Internal Revenue Service. Publication 590-A (2025), Contributions to Individual Retirement Arrangements (IRAs)
7
Internal Revenue Service. Instructions for Form 8606 (2025)
8
Internal Revenue Service. Form 8606 – Nondeductible IRAs
9
Internal Revenue Service. Publication 590-B (2025), Distributions From Individual Retirement Arrangements (IRAs)