What Is IRA Basis and How Does It Impact Taxes?

Depending on the type of retirement account you have, IRA contributions can be fully deductible, partially deductible, or nondeductible. As a result, you can end up with a mix of pre-tax and after-tax contributions, which makes things tricky to report on your tax return when it’s time to withdraw. 

That’s where your IRA basis comes in. It separates your after-tax contributions so you don’t pay taxes on them again when you start taking withdrawals. But here’s the catch: The Internal Revenue Service (IRS) doesn’t automatically track your IRA basis for you. 

Let’s take a closer look at the different types of IRA basis and give you tips on how to keep track of yours.

What is IRA basis?

Your IRA basis is the amount of after-tax money contributed to your traditional individual retirement accounts (IRAs), less any withdrawals of after-tax contributions you’ve made. Your after-tax contributions may include nondeductible traditional IRA contributions and/or after-tax funds rolled over from other retirement plans.

How IRA basis works

Let’s say you have a traditional IRA worth $75,000, and $15,000 of that comes from contributions you already paid taxes on (or after-tax contributions). That $15,000 is considered to be your IRA basis and that amount won’t be taxed again when you withdraw. The remaining $60,000 consists of pre-tax contributions and investment growth. When you take a distribution from the remaining $60,000, you’ll owe taxes on that withdrawal amount from the IRA balance.

But how does after-tax money end up in your IRA basis in the first place? Suppose you contributed $3,000 to a traditional IRA while also participating in a 401(k) at work. For 2025, if your Modified Adjusted Gross Income (MAGI) as a single filer is $100,000, it would exceed the deduction phase-out limit of $89,000, making your IRA contribution nondeductible. Since you’ve already paid taxes on that $3,000, it’s added to your IRA basis.

Tracking your IRA basis prevents double taxation when it comes time to withdraw funds from a traditional IRA or when converting to a Roth IRA.

Traditional IRA vs. Roth IRA basis

Contributions to Roth IRAs are always made with after-tax dollars. Because Roth IRA contributions are never deductible, contributions will always count toward your Roth IRA basis.

Traditional IRA contributions can be either nondeductible (after-tax) or deductible (pre-tax), depending on your income and workplace retirement plan participation. 

Only after-tax contributions are part of your traditional IRA basis.

The importance of tracking your IRA basis

Who keeps track of your IRA basis? Primarily you! The IRS doesn’t automatically track your IRA basis, so you’ll need to keep accurate records and file the required forms to update it. Here’s what to do: 

• Nondeductible traditional IRA contributions: You’ll need to report any nondeductible traditional IRA contributions you make during the year on Form 8606 when you file taxes. This tells the IRS how much to add to your IRA basis. Keep all 8606 forms over the years to verify your cumulative traditional IRA basis. 
• Nondeductible traditional IRA distributions: Generally, if you receive a distribution from a traditional IRA with a basis, you must report it on Form 8606 to reduce your IRA basis accordingly. 
• After-tax retirement plan-to-traditional IRA rollovers: You’ll need to report the after-tax amount you rolled over to your traditional IRA using Form 8606. Doing so notifies the IRS to increase your traditional IRA basis by that amount. 
• Roth IRA contributions: All contributions to Roth IRAs are nondeductible and consist of  after-tax dollars, so the IRS doesn’t require you to report them annually to update your Roth IRA basis. However, you can personally track them by keeping copies of Form 5498, which your Roth IRA custodian sends you each year. 

According to Jotika Teli, CPA, “Tracking your IRA basis accurately ensures you are only taxed on retirement distributions from funds that were not taxed yet. Any contributions made to your retirement account from after tax dollars have already been subjected to tax. Therefore, you do not need to pay taxes on those distributions and be subject to double taxation on the same income.”

How to calculate your IRA basis

If you’re wondering what your traditional IRA basis is, here’s how to calculate it: 

1. Add up your after-tax contributions: Include all nondeductible contributions you’ve made to your traditional IRA accounts since opening them, along with any after-tax funds you’ve rolled into the accounts from other retirement plans. 
2. Subtract distributions of after-tax funds: If you’ve withdrawn any after-tax funds from your traditional IRAs, deduct them from your total.
3. Calculate your current IRA basis: The remaining amount is your traditional IRA basis.

Example calculation:

• Total after-tax contributions: $30,000
• Total withdrawn after-tax contributions: $5,000
• IRA basis: $25,000

This $25,000 will be tax-free when you withdraw it. However, if your traditional IRA also contains pre-tax funds, withdrawals must follow the pro-rata rule, meaning each withdrawal is a proportional mix of taxable and nontaxable funds. You aren’t allowed to only withdraw your tax-free funds first. 

Note: All traditional IRA accounts are treated as one account. The basis is the total basis for all traditional IRA accounts combined. So, if you take a distribution from a traditional IRA, it does not matter which account the distribution comes from; the basis is still the same.

How TurboTax can assist with IRA basis tracking

Tracking your IRA basis is essential to avoid double taxation on after-tax withdrawals from traditional IRAs and Roth IRA conversions. If you’ve made nondeductible contributions or rolled over after-tax funds from another retirement plan, keep accurate records and update your IRA basis as needed by using Form 8606.

Not sure where to start? No worries. TurboTax can guide you through filling out Form 8606. We’ll ensure that your after-tax contributions and withdrawals are accurately reported. Plus, we can help you calculate the taxable and tax-free portions of your distributions. TurboTax is here to accurately help you report your retirement savings and help you file with confidence. Get started today!