nondeductible traditional ira contributions and form 8606

In short

If you put after tax money into a traditional IRA, you may be wondering how to keep from paying tax on it a second time. Report the contribution on Form 8606 in the same year you make it. That form records your basis, which is the money you already paid tax on. The IRS does not track basis for you, so the paper trail is yours to keep. Each year you take money out, the form helps sort tax free dollars from taxable ones. Keep every copy, because the day you need it may be thirty years away.

The whole of it

What it is

A friend of mine once told me an IRA was just a bucket where money waits for retirement. That is close, but the bucket comes in two flavors of dollars. Some dollars go in before tax, and the owner takes a deduction for them. Other dollars go in after tax, with no deduction at all. Those are called nondeductible contributions.

You may be holding a situation like this. You have a job with a retirement plan, your income is a bit high, and the IRS will not let you deduct a traditional IRA contribution. You can still put money in. The law allows it, and the money still grows without yearly tax. But something has to tell the IRS that these dollars were already taxed. That something is Form 8606, titled Nondeductible IRAs. The IRS publishes the form and its instructions, and Publication 590-A and Publication 590-B explain the rules in plain terms.

The form records your basis. Basis is just the total of your after tax contributions. Without it on file, the IRS treats every dollar withdrawn as taxable. That would be a poor deal, and it is entirely avoidable.

How it works

If you have ever filled out a tax return, you know the feeling of a form that seems to want more than it should. Form 8606 is shorter than most. In the year of a nondeductible contribution, the filer attaches the form to the return. Part I asks about that year's contribution, the total basis, and any withdrawals.

The form tracks basis year after year. The basis from last year's form carries into this year's. If you put in $2,000 one year and $2,000 the next, the form shows $4,000 of basis. It stays on the books until the money comes out.

Withdrawals bring in a rule that surprises people. The IRS does not let the owner pick which dollars come out first. It treats all traditional, SEP IRA, and SIMPLE IRA balances as one pot. This is called the pro rata rule, which means each withdrawal is split between basis and pre tax money in the same mix as the whole pot. The share of basis comes out tax free. The rest is taxed as ordinary income.

Form 8606 is where that math happens. The filer lists the year end value of all those IRAs, adds back what was withdrawn, and divides the basis by that total. The result is the tax free share. The form must be filed in any year there is a nondeductible contribution. It must also be filed in any year a withdrawal is taken from an IRA that has basis.

The numbers, and where to find yours

You probably want to know how much you can put in. That limit is set by law and changes by year. For this year, the IRA contribution limit is $7,500 for 2026 (source, checked 10/4/2026). The extra catch up amount for people age the current figure, which the official source publishes each year and older is the current figure, which the official source publishes each year. The IRS posts these figures each year, and the site fills in the verified number with its source and date.

Whether a contribution is deductible depends on income. It also depends on whether the owner or a spouse is covered by a workplace plan. Those income ranges change by year too. The current phase out range for your filing status is the current figure, which the official source publishes each year. A phase out is a band of income where the deduction shrinks step by step until it disappears. The IRS lists these ranges in Publication 590-A.

Your own numbers live in a few places. Your basis is on last year's Form 8606, in the section that shows your total basis for the year. Line numbers can shift when the IRS updates the form, so read the labels on the current version and match them to last year's copy. Your year end IRA balance is on the Form 5498 your custodian sends, with the fair market value in Box 5. Withdrawals show on Form 1099-R. Keep all three together in one folder.

A worked example

Let me tell you about Marcus. He is 45 and earns a good salary, and he has a 401(k) at work. His income is above the line where a deduction is allowed. He decides to put $6,000 into a traditional IRA anyway, with no deduction. He files Form 8606 with his return, and his basis is now $6,000.

Marcus does this for two more years. After three years, his basis is 3 times $6,000, which is $18,000. By then the IRA also holds growth, and it is worth $25,000. Years later, at age 60, he takes out $5,000.

Here is the math on Form 8606. Suppose Marcus has no other IRAs. His basis is $18,000, and his IRA is worth $25,000 after the withdrawal. The form adds the $5,000 back, which gives $30,000 in total. Now divide the basis by that total. $18,000 divided by $30,000 is 0.60, or 60 percent.

So 60 percent of the withdrawal is tax free. That is 0.60 times $5,000, which is $3,000. The other $2,000 is taxable income. His basis drops by the $3,000 that came out tax free, from $18,000 to $15,000. That new figure carries to next year's form.

Now picture Marcus without the form. The IRS sees $5,000 leave a traditional IRA and has no record of basis. All $5,000 is taxed. He pays tax on $3,000 that was already taxed once. That is how a missing form can cost real money. It is an easy mistake to make.

Where it goes wrong

I have noticed that the costliest errors are quiet ones. Nobody sends a warning. The most common slip is forgetting to file the form in the year of the contribution. The IRS can charge a penalty for each failure to file Form 8606, and it can charge another one for overstating basis. The Form 8606 instructions name the current amounts. Those penalties are small next to paying tax twice.

Another trap is the pro rata rule. A person might think, I will just take out the after tax dollars and leave the rest. The IRS says no. Every traditional, SEP IRA, and SIMPLE IRA the person owns counts in the pot. Roth IRAs and workplace plans do not. A big old rollover IRA can shrink the tax free share of a withdrawal to almost nothing.

Records matter too. Custodians change, and statements go missing. Basis is only as good as the paper behind it, so keep each year's Form 8606 and a copy of each return. Spouses file their own forms. A joint return needs one form for each spouse who has basis.

One more point. A contribution made by the April tax deadline can count for the prior year. The form must follow the year the contribution is assigned to. Note the assigned year on your records, and match them to the right return.

Questions to answer before you leave this page

Have you looked at last year's Form 8606 to see what basis the IRS already shows for you? Do you know the year end value of every traditional, SEP, and SIMPLE IRA you own, since the pro rata rule counts them all together? Did your custodian send a Form 5498 for each account, and can you find it today? If you put money in after the tax deadline, did you assign it to the right year? When a withdrawal comes, will you have the forms ready to show the tax free share? And is there one folder, in one place, where a spouse or a child could find all of it?