Form 8606: Tracking Nondeductible IRA Contributions

Form 8606 is the IRS’s tool for tracking after-tax contributions to IRAs and calculating which portion of a withdrawal is taxable. If you make a nondeductible contribution and don’t file it, the IRS will tax your entire withdrawal as ordinary income—even though you paid tax on the contribution once already, creating double taxation. The form accumulates your basis over years and applies the pro-rata rule to every IRA distribution.

Why Form 8606 exists

The IRS allows nondeductible IRA contributions—money you put into a traditional IRA that doesn’t reduce your taxable income in the year of contribution. This typically happens when your modified adjusted gross income (MAGI) exceeds the deduction phase-out range for your filing status, or when you’re covered by an employer 401(k) or other retirement plan and earn too much to claim the deduction.

When you eventually withdraw from the IRA, the IRS needs to know which portion of your withdrawal is return of basis (already taxed) and which portion is earnings (taxable now). Without Form 8606, the IRS has no record of your after-tax contributions and will tax your entire withdrawal as ordinary income.

Form 8606 is the institutional memory: it tracks your cumulative basis across years so that when you take a distribution, only the gains inside the IRA are taxed as ordinary income, and your contributions come out tax-free.

Filing triggers and annual requirements

You must file Form 8606 if you:

• Make a nondeductible traditional IRA contribution in any year, even if you also make deductible contributions to the same account or to a 401(k).

• Convert a traditional IRA or SEP-IRA to a Roth IRA (regardless of whether the conversion was part deductible or part nondeductible).

• Make a recharacterization (undoing a Roth conversion) — though recharacterizations are no longer permitted after 2017 except in narrow circumstances.

• Take a distribution from a traditional IRA, SEP-IRA, or SIMPLE IRA in any year you’ve previously filed Form 8606 or have outstanding basis to recover.

Once you’ve filed Form 8606 for a nondeductible contribution, the form and your basis record persist. Even if you don’t contribute again for five years, when you take a distribution in year six, you must file Form 8606 again to report which portion of the distribution is basis (nontaxable) and which is gain (taxable).

How basis accumulates: a multi-year example

Imagine you contribute to a traditional IRA:

Year 1: You make a $7,000 nondeductible contribution. Your IRA grows to $9,000 by year-end.

• Form 8606: You report $7,000 basis.

Year 2: You add another $7,000 nondeductible contribution. The account (including the prior $9,000) grows to $18,000 by year-end.

• Form 8606: You report cumulative basis of $14,000 ($7,000 prior + $7,000 new).

Year 3: You don’t contribute, but the account grows to $22,000. You withdraw $10,000.

• Form 8606: You report basis of $14,000 and total account balance of $22,000. The pro-rata rule applies: $14,000 ÷ $22,000 = 63.6% of all distributions are basis (nontaxable); 36.4% are earnings (taxable).
• On the $10,000 withdrawal: $6,360 is tax-free basis recovery; $3,640 is taxable gain.

Without Form 8606, the IRS assumes you have zero basis and taxes the entire $10,000 as ordinary income. You’d owe tax twice: once on the original $7,000 + $7,000 contributions (when you made them out of after-tax income) and again when you withdraw.

The pro-rata rule and its scope

The pro-rata rule is the critical mechanism: it applies to any distribution from any traditional IRA, SEP-IRA, or SIMPLE IRA, and it considers the combined balance of all such accounts, not just one account.

Example: You have two traditional IRAs:

• IRA A: $60,000 (all pre-tax contributions)
• IRA B: $20,000 (all nondeductible contributions)
• Total: $80,000; basis: $20,000

If you withdraw $20,000 from IRA A, the pro-rata rule applies to the withdrawal amount, not the account withdrawn from:

Taxable portion = $20,000 × ($60,000 ÷ $80,000) = $15,000 Nontaxable basis = $20,000 × ($20,000 ÷ $80,000) = $5,000

You can’t cherry-pick nondeductible IRA accounts and claim they’re entirely basis-free. The rule aggregates all pre-tax and post-tax IRAs.

However, 401(k) plans, Roth IRAs, and SEP-IRA accounts at different employers are treated separately. A Roth conversion also invokes the pro-rata rule across all traditional IRAs, SEP-IRAs, and SIMPLE IRAs, which is why high-earners doing backdoor Roth conversions with large pre-tax IRA balances face an unexpected tax bill.

The consequence of not filing

If you fail to file Form 8606 when you should have, the penalty is steep:

• The IRS taxes your entire distribution as ordinary income, ignoring your basis.

• You pay ordinary income tax on the full amount at your marginal tax bracket.

• You have already paid tax on the contribution amount out of after-tax dollars, creating double taxation.

• You can amend past years by filing Form 8606 late, but the statute of limitations applies. If more than three years have passed, the IRS may not allow a refund.

Example: You contributed $7,000 nondeductible in 2015, didn’t file Form 8606, and withdrew $20,000 in 2024. Without the form, all $20,000 is taxed as ordinary income. With Form 8606 filed late, you can recover $7,000 of basis and owe tax only on $13,000 of gain—but you’ll owe penalties and interest for the amended return.

Roth conversions and Form 8606

If you convert a traditional IRA to a Roth IRA, Form 8606 tracks the conversion and applies the pro-rata rule. If you have $100,000 in a traditional IRA ($80,000 pre-tax, $20,000 basis) and you convert $50,000, the conversion is deemed to come 80% from pre-tax funds ($40,000) and 20% from basis ($10,000).

You owe income tax on the $40,000 converted pre-tax portion. The $10,000 basis portion is not taxed again. Form 8606 reconciles this split and ensures you don’t pay tax twice on the basis.

This pro-rata rule also means you can’t avoid taxation on Roth conversions by selectively converting from a low-basis IRA. The rule enforces proportional conversion of basis and pre-tax funds.

Amended returns and statute of limitations

You can file Form 8606 late to correct a missed filing, but you must file within the statute of limitations (typically three years, or up to seven years if you’re claiming a refund due to the error). After that window closes, you may be unable to recover the lost tax benefit.

Best practice: File Form 8606 in the year you make the nondeductible contribution, not when you withdraw. This creates a clear audit trail and ensures the IRS record is correct from the start.

See also