How Form 8606 Calculates the Taxable Portion of a Nondeductible IRA Distribution

Form 8606 exists because of a simple problem: once you mix nondeductible contributions into a traditional IRA that also holds pre-tax money, the IRS needs a way to figure out how much of any withdrawal is already-taxed basis and how much is still owed tax. The form does this with a pro-rata formula that adds your year-end IRA value, distributions, and any conversions together to represent everything that could have come from basis during the year.

Why the form treats all your IRA money as one pool

When you make a nondeductible contribution, or roll after-tax money into a traditional IRA, that amount becomes your cost basis in the account. Because you already paid tax on that money once, the IRS does not tax it again when it comes out. Instead, each distribution is assumed to carry out a proportional slice of basis and a proportional slice of taxable money, continuing that way until all the basis has been used up.

The anatomy of Form 8606's pro-rata calculation

• Line 1–3: Your nondeductible contributions create cost basis in the IRA, and because that money was already taxed once, the portion of any distribution attributable to basis is not taxed again.
• Line 9: Lines 6, 7, and 8 added together, representing everything that could possibly have come from basis during the year.
• Line 10: In the worked example, basis divided by line 9 produced the ratio applied to figure the nontaxable portion of that year's distributions and conversions, following the simplified illustrative scenario built for this calculation.
• Line 12: In the worked example, the nontaxable portion of the distribution is found by applying the line 10 ratio, giving $10,000 × 0.150 = $1,500.
• Line 15a: The taxable amount left over after subtracting the nontaxable portion from the distribution, which in the worked example is $10,000 − $1,500 = $8,500.
• Line 14: The basis carried forward to next year after subtracting what was just used, which in the worked example is $15,000 − $1,500 = $13,500.

Parts of Form 8606, Part I, that produce the taxable amount

A worked example: $15,000 of basis against a $90,000 year-end balance

Picture a hypothetical traditional IRA owner who has $15,000 of basis carried forward on Form 8606 lines 2 and 3, took a $10,000 distribution during the year, converted nothing to a Roth IRA, and finished the year with $90,000 across their traditional IRAs. Line 9 adds the year-end value, the distribution, and the conversion together: $90,000 plus $10,000 plus $0 equals $100,000. Line 10 divides basis by that total: $15,000 divided by $100,000 equals a ratio of 0.150, meaning 15 percent of every dollar distributed this year is treated as nontaxable basis. Applying that ratio to the $10,000 distribution gives a nontaxable portion of $1,500 on line 12, which leaves $8,500 as the taxable amount reported on line 15a. The remaining basis carried forward to next year, on line 14, is $15,000 minus the $1,500 just used, or $13,500. Note this scenario assumes no current-year nondeductible contribution, no January\u2013April contributions designated for the prior year, and no Roth conversion, which keeps the math focused purely on the basic pro-rata mechanic.

• basis: 15000
• year end value: 90000
• distribution: 10000
• conversion: 0
• Formula: (basis / (year end value + distribution + conversion))
• Result: 0.15

How basis builds up over several years of contributions

That $300 nondeductible amount is the figure that would carry onto her Form 8606 as basis, the same type of number used as the starting point in the pro-rata calculation shown above.

Years	Deductible contributions	Nondeductible contributions
2018–2023 (six years)	$9,000 total	$0
2024	$700	$300
Totals (2018–2024)	$9,700	$300

Rose Green's contribution history, as used in IRS Publication 590-B

Key takeaways

• Nondeductible contributions and rolled-over after-tax amounts create basis, and the portion of a distribution matching that basis is not taxed again.
• Line 9 adds the year-end IRA value, ordinary distributions, and any Roth conversions to represent everything that could have come from basis during the year.
• In the worked example — which assumes no current-year nondeductible contribution, no January-April prior-year-designated contribution, and no Roth conversion — a $15,000 basis against a $100,000 combined total produced a 0.150 ratio, making $1,500 of a $10,000 distribution nontaxable and $8,500 taxable.
• Unused basis carries forward — in the example, $13,500 remained after the distribution, to be used in the same pro-rata way in future years.

Frequently asked questions about Form 8606's calculation

What happens to my basis after part of it is used in a distribution?

The portion of basis used to offset that year's distribution is subtracted from your running basis total, and the same nontaxable-and-taxable split continues on future distributions until the basis is exhausted.

Do Roth conversions get the same pro-rata treatment as regular distributions?

Line 9 adds the year-end IRA value, ordinary distributions, and any Roth conversion amount together to represent everything that could have come from basis during the year, so a conversion is folded into the same ratio as an ordinary distribution.

Where does the basis figure on lines 2 and 3 actually come from?

It comes from your history of nondeductible contributions and any after-tax amounts you rolled over, which is why keeping every prior Form 8606 on file matters — Publication 590-B's Rose Green example shows how a taxpayer's contribution history across several years, including a single $300 nondeductible contribution, becomes the basis figure carried forward.

Sources

• www.irs.gov
• www.irs.gov