If your income is too high to deduct a traditional IRA contribution, you can still make an after-tax (nondeductible) contribution. Doing so creates a basis record the IRS requires you to maintain with Form 8606.
When Is Form 8606 Required?
File Form 8606 in any of these situations:
- You made a nondeductible contribution to a traditional IRA
- You took a distribution from a traditional, SEP, or SIMPLE IRA while you have any after-tax basis
- You converted a traditional, SEP, or SIMPLE IRA to a Roth IRA
- You took a nonqualified distribution from a Roth IRA and need to figure the taxable part
The form attaches to your Form 1040. A $50 penalty applies if you fail to file when required, and without a basis record the IRS may tax your after-tax contributions a second time.
What Is IRA Basis?
Your IRA basis is the cumulative total of nondeductible contributions you have made over the years that you have yet to recover through distributions. If you contributed $7,000 nondeductibly in each of the last three years and took no distributions, your basis is $21,000.
Part I of Form 8606 reports new nondeductible contributions and updates your cumulative basis. When you later take a distribution or convert to Roth, the form calculates how much of that money is already tax-free.
How the Pro-Rata Rule Works
The IRS does not allow you to choose which dollars come out of your IRA first. Instead, the pro-rata rule under IRC Section 408(d)(2) treats all your traditional, SEP, and SIMPLE IRAs as one aggregated pool. Any distribution or conversion comes out proportionally: part pre-tax, part after-tax.
Taxable Conversion Amount
CalculationNontaxable Share: IRA basis divided by the total of all traditional, SEP, and SIMPLE IRA year-end balances plus the amount converted
Nontaxable Amount: Nontaxable share multiplied by the amount converted
Taxable Amount: Amount converted minus the nontaxable amount
Example: You have $100,000 in a rollover IRA (all pre-tax) and a separate $7,000 IRA funded entirely with nondeductible contributions. Total IRA value: $107,000. Basis fraction: $7,000 / $107,000 = 6.5%. If you convert only the $7,000 account expecting a tax-free conversion, the pro-rata rule applies across all your IRAs: only 6.5% × $7,000 = $455 comes out tax-free. The remaining $6,545 is taxable, even though you converted dollars you already paid tax on.
The Backdoor Roth and the Pro-Rata Problem
High earners above the Roth IRA income limit use the backdoor Roth: make a nondeductible traditional IRA contribution, then convert it to Roth immediately. If you have no other pre-tax IRA balances, the pro-rata ratio is essentially 100% after-tax, making the conversion nearly tax-free.
The strategy breaks down if you hold existing pre-tax IRA assets, including rollover IRAs and SEP IRAs. The pro-rata rule applies to all your IRAs combined, including the ones you left untouched.
One solution: if your employer plan accepts incoming rollovers, move your pre-tax IRA balance into the 401(k) before the conversion. This clears the pro-rata denominator and lets the backdoor Roth work as intended.
Common Mistakes to Avoid
Forgetting SEP and SIMPLE IRAs. Both count in the pro-rata denominator. Many taxpayers include only their traditional IRAs.
Missing prior-year basis. If you failed to file Form 8606 in a year you made a nondeductible contribution, file a corrected return or standalone Form 8606 for that year. Without the record, you have no proof of basis.
Discarding old filings. The IRS can challenge your accumulated basis if you cannot produce prior-year Form 8606 filings. Keep copies indefinitely alongside your tax records.
Filing Details
Form 8606 is due with your annual return. If you missed it in a prior year, you can file a standalone form for that year to establish your basis retroactively. The $50 late-filing penalty can be waived for reasonable cause.
Have questions about Form 8606, the backdoor Roth, or IRA basis tracking? Contact TS CPA for a free consultation. We respond within the same day.