Roth IRA Cost Basis: Ordering Rules, Five-Year Rules, and Form 8606

Your Roth IRA cost basis is the total after-tax money you have put into the account through regular contributions, Roth conversions, and rollovers from other Roth accounts. That number matters because the IRS lets you pull your basis out at any age, tax-free and penalty-free, before it touches a dollar of your earnings. Nobody keeps a running total for you, so tracking it is your job.

What Builds Your Basis

Three kinds of money add to your basis, and each one lands there a little differently.

Regular contributions are the simple case. You fund them with income you have already paid tax on, and they are not deductible. If you maxed out a Roth for ten years at $6,000 and then two more years at $7,000, your contribution basis is $74,000. For 2026, the annual limit is $7,500, or $8,600 if you are 50 or older, and the ability to contribute directly phases out at higher income levels depending on your filing status.¹²

Conversion amounts come from moving money out of a pre-tax account, such as a traditional, SEP, or SIMPLE IRA, into your Roth. You owe ordinary income tax on the converted amount in the year of the conversion, and once that tax is paid the converted dollars become part of your Roth basis.³ Every conversion starts its own separate five-year penalty clock, which is the wrinkle most people miss.

Rollovers from a Roth 401(k) or Roth 403(b) round out the picture. Those dollars were already taxed at the source and carry their after-tax status into the Roth IRA, transferring the existing basis with them.

Your total basis is the running sum of all three. The IRS treats that sum as the first money out of the account whenever you take a withdrawal.

Why the Basis Number Matters: The Ordering Rules

Every Roth IRA withdrawal follows a strict three-tier order set by the IRS. You cannot choose which bucket to draw from. Each tier must be emptied before the next one is touched.⁴

Regular contributions come out first. You can withdraw them at any age, for any reason, with no tax and no penalty. This is why the basis number is so useful.⁵
Conversion and rollover amounts come out next, on a first-in, first-out basis, with the taxable portion of each conversion treated as coming out before the nontaxable portion. These dollars are not taxed again, but if you are under 59½ and the specific conversion has not met its own five-year clock, the taxable portion is hit with the 10% early withdrawal penalty.⁶
Earnings come out last. If the distribution is non-qualified, earnings are subject to both ordinary income tax and the 10% penalty.⁴

One more thing about scope: even if you hold Roth IRAs at several brokerages, the IRS aggregates them into a single account for basis and ordering purposes.⁶ Your total Tier 1 basis is the sum of every contribution and conversion across every Roth IRA you own. You have to track the whole picture, not just the account you plan to withdraw from.

The Two Five-Year Rules

People talk about “the” five-year rule as if there is one. There are two, and mixing them up is where most of the mistakes happen.

The Overall Roth Five-Year Rule

For earnings to come out tax-free and penalty-free as a qualified distribution, you must be at least 59½ (or meet another qualifying exception) and your Roth IRA must have been open for at least five tax years.⁷ The clock starts January 1 of the tax year of your first-ever Roth contribution. Open a Roth in March 2024 and designate the contribution for 2023, and the clock runs from January 1, 2023 to January 1, 2028.

Other qualifying situations include permanent disability, distributions to a beneficiary after your death, and up to $10,000 for a first-time home purchase.⁸ All of them still require the five-year clock to have been met for the distribution to be fully qualified.

The Conversion-Specific Five-Year Rule

Each conversion has its own separate five-year clock. Convert $50,000 in 2023 and another $30,000 in 2025, and you have two independent timers. Withdrawing from the 2023 conversion before January 1, 2028 while under 59½ triggers the 10% penalty on the taxable portion of that conversion. The 2025 conversion runs its own clock until January 1, 2030.

Once you turn 59½, this conversion-specific penalty goes away entirely, and only the overall five-year rule for earnings still matters.

The Pro-Rata Rule Affects How Much Basis a Conversion Creates

If you convert traditional IRA money that contains both pre-tax and after-tax dollars, the IRS will not let you cherry-pick only the after-tax portion. The conversion is treated as proportional across all your traditional, SEP, and SIMPLE IRAs combined.

Suppose you have $80,000 in traditional IRAs and $5,000 of it is after-tax nondeductible contributions. That is 6.25% after-tax. Convert $50,000 to a Roth, and about $3,125 is treated as after-tax while $46,875 is taxable income. Your Roth basis picks up the full $50,000 (because you paid tax on the taxable portion at conversion), but your tax bill for the year is based on the $46,875.

This is what catches people during backdoor Roth conversions. A nondeductible traditional IRA contribution followed by an immediate conversion looks clean on paper, but a large rollover IRA sitting in the same taxpayer’s name forces most of the conversion to be taxable under the pro-rata calculation.

How to Track and Report Your Basis

Form 8606 is where your Roth basis lives on paper. Part III of the form tracks your cumulative contributions and conversions and applies the ordering rules to figure out whether any part of a distribution is taxable.⁹ You do not have to file Form 8606 just because you made regular Roth contributions in a given year, but you must file it whenever you take a non-qualified distribution or make a conversion.¹⁰

Your custodian reports annual contributions to the IRS on Form 5498, but that form only covers a single year.¹¹ No custodian keeps a lifetime running total, and one custodian will not know about contributions you made at another. Maintaining the cumulative number is on you.

Records to Keep

The IRS recommends holding onto these documents until every dollar has been distributed from your Roth IRAs:¹⁰

Page 1 of your Form 1040 for each year you made a nondeductible traditional IRA contribution (relevant if you have done conversions)
Every Form 8606 you have filed, plus any supporting worksheets
Form 5498 statements from each custodian showing annual contributions
Form 1099-R for each year you received a distribution

If records are missing, you can request prior-year tax return transcripts from the IRS and ask each custodian for Form 5498 history. Rebuilding basis from those pieces is tedious but doable.

What Happens If You Skip Form 8606

Failing to file Form 8606 when required carries a $50 penalty, but the real damage is bigger. Without the form on file, the IRS has no record of your basis and may treat the entire distribution as taxable income, hitting money you already paid tax on with income tax and possibly the 10% early withdrawal penalty.¹⁰ Late Forms 8606 can be filed to fix this, but reconstruction after the fact is much harder than keeping the paperwork current.

Excess Contributions Do Not Count as Basis

Money you were not allowed to contribute, whether because you exceeded the annual limit or because your income was above the phase-out, does not count as valid basis. It also accrues a 6% excise tax for every year it sits in the account.¹

To avoid the penalty, withdraw the excess contribution and any earnings it generated by the due date of your tax return, including extensions. If you filed by April 15 with an extension, you generally have until October 15 to pull the money out. The earnings on the excess are taxable income for the year the contribution was made; the excess amount itself just comes back to you. Miss the deadline, and the 6% tax applies for each year the excess remains until you withdraw it or absorb it into the next year’s contribution limit if you have room.¹

1
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
2
Internal Revenue Service. Roth IRAs
3
Internal Revenue Service. Retirement Plans FAQs Regarding IRAs – Rollovers and Roth Conversions
4
Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs) – Ordering Rules for Distributions
5
Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs
6
Office of the Law Revision Counsel. 26 U.S. Code 408A – Roth IRAs
7
Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs)
8
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
9
Internal Revenue Service. About Form 8606, Nondeductible IRAs
10
Internal Revenue Service. Instructions for Form 8606 (2025)
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Internal Revenue Service. About Form 5498, IRA Contribution Information (Info Copy Only)