Non-Deductible IRA Contributions & Form 8606: Track Your Basis Before You Roll Over

If your income is above the deduction phaseout and you've made non-deductible traditional IRA contributions, you've built up IRA basis — money that was already taxed. Form 8606 is the only thing standing between you and paying tax on it again. Rolling a 401(k) into the same IRA pool can quietly dilute that basis fraction, raising the tax on every future Roth conversion.

What is a non-deductible IRA contribution?

A traditional IRA contribution is deductible only if you meet one of two conditions: you don't participate in a workplace retirement plan, or your income is below the phaseout range. If you're above the phaseout and still contribute to a traditional IRA, the contribution goes in with after-tax dollars — it's "non-deductible."

2026 deductibility phaseout ranges (IRS Notice 2025-67)

The 2026 IRA contribution limit is $7,500 (or $8,600 if you're 50 or older). If you earn above the phaseout and contribute anyway, your entire contribution is non-deductible. If you're in the phaseout range, part is deductible and part isn't.

Note: if your income is above the Roth IRA phaseout ($153,000 single / $242,000 MFJ in 2026), making a non-deductible traditional IRA contribution and then converting it — the "backdoor Roth" — is usually a better path than leaving the money in a traditional IRA earning taxable growth. But that only works if your IRA pool is clean of pre-tax dollars (more on this below).

Why non-deductible contributions create a tax problem without Form 8606

When you eventually withdraw from a traditional IRA, the IRS presumes every dollar is pre-tax unless you can prove otherwise. Non-deductible contributions are the exception — they already went through the income tax grinder. Without a paper trail, you'll pay income tax on them again when they come out.

Form 8606 is that paper trail. It's a permanent running record of your IRA basis, filed every year you:

• Make a non-deductible traditional IRA contribution
• Convert any IRA funds to Roth
• Take a distribution from a traditional IRA that has any non-deductible basis

The penalty for not filing: IRC § 6693(b)(1) imposes a $50 penalty per year you fail to file Form 8606 when required. More importantly, the IRS can disallow your basis entirely if you can't document it.

Form 8606 walkthrough: Part I, II, and III

Part I — Reporting new non-deductible contributions

Part I is straightforward. You report:

• Your non-deductible contribution for the current year (line 1)
• Your total basis in traditional IRAs from prior years' Form 8606 (line 2)
• Your cumulative total basis going forward (line 14)

If your contribution is $7,500 and you had $22,500 of prior basis, your new cumulative basis is $30,000. This number carries to next year's Form 8606 line 2.

Part II — Roth conversions and the pro-rata calculation

This is where it gets complex. When you convert IRA funds to Roth, the IRS calculates the taxable portion using all your traditional, SEP, and SIMPLE IRA balances on December 31 of that year — not just the account you converted from.

The formula (IRC § 408(d)(2)):

Tax-free % = Total basis (line 14) ÷ Total year-end IRA value (all accounts)

If you have $30,000 of basis in a $300,000 IRA, your tax-free fraction is 10%. Converting $30,000 to Roth costs you $27,000 in ordinary income (the other 90%).

Part III — Traditional IRA distributions with basis

Same pro-rata formula applies to cash withdrawals. If you take $50,000 from your traditional IRA and your basis fraction is 10%, only $5,000 comes out tax-free. The remaining $45,000 is ordinary income.

How a 401(k) rollover affects your basis fraction

This is the critical interaction most people miss when rolling a 401(k) into an IRA.

Before the rollover

You've made non-deductible contributions for several years:

• Total IRA basis (Form 8606 line 14): $30,000
• Total traditional IRA value: $130,000 (basis + $100K of growth)
• Tax-free fraction on any conversion: $30,000 ÷ $130,000 = 23.1%
• If you convert $30,000: ~$6,920 tax-free, ~$23,080 taxable

After rolling a $500,000 401(k) into the same IRA

• Total basis: still $30,000 (401(k) pre-tax funds add zero basis)
• Total traditional IRA value: $630,000
• Tax-free fraction: $30,000 ÷ $630,000 = 4.8%
• If you convert the same $30,000: only ~$1,440 tax-free, ~$28,560 taxable
• Difference: an extra ~$5,480 in taxable income on the same conversion

Your $30,000 of already-taxed dollars doesn't disappear — it's still tracked on Form 8606. But it's now a much smaller fraction of a much larger pool. Every Roth conversion you make going forward pulls proportionally from both pre-tax and after-tax dollars.

Non-deductible IRA basis: Form 8606 calculator

Your options when you have IRA basis and a 401(k) to roll

Option 1: Roll the 401(k) to a new employer's 401(k) instead

Pre-tax 401(k) money in a 401(k) doesn't count in the IRA pro-rata calculation — only IRA balances do. If your new employer's plan accepts incoming rollovers, send the old 401(k) there rather than to an IRA. Your IRA pool stays small, your basis fraction stays high, and your backdoor Roth conversions stay clean.

Option 2: Roll the 401(k) to a traditional IRA, then reverse-roll the pre-tax IRA to a 401(k)

If you've already rolled a 401(k) to an IRA and contaminated the pool, you can fix it. Many employer 401(k) plans accept "reverse rollovers" — incoming transfers of pre-tax traditional IRA money. If you reverse-roll the pre-tax balance to your new 401(k) before December 31, your IRA balance on December 31 is just your basis amount, and conversions are 100% (or near-100%) tax-free.

Critical: only pre-tax IRA funds can be reverse-rolled to a qualified plan. Non-deductible (after-tax) IRA funds cannot move to a 401(k) per IRC § 408(d)(3)(A)(ii). They stay in the IRA. This is actually the feature you want — the pre-tax funds leave, the basis stays, and your conversion is clean.

Option 3: Leave the 401(k) in the old plan

Leaving the old 401(k) alone doesn't affect your IRA's pro-rata ratio at all. If the plan's investment options are acceptable, this is the simplest fix. The downside: you lose IRA flexibility (custom beneficiary designations, Roth conversion access, fund selection), and you'll eventually need to manage another account.

Option 4: Convert the pre-tax IRA to Roth (and pay the tax)

If you're going to add a large pre-tax rollover anyway, you might accelerate Roth conversions before rolling in. Convert pre-tax IRA dollars while your basis fraction is still high (when the pre-tax IRA balance is relatively small), then roll in the 401(k). More tax up front, but the Roth balance grows forever tax-free.

What happens to IRA basis when you die?

Basis transfers to beneficiaries. When a non-spouse beneficiary inherits your traditional IRA, they also inherit your Form 8606 basis tracking. Distributions they take apply the same pro-rata formula. Basis doesn't vanish at death — it just becomes someone else's paperwork problem. Document it clearly in your estate planning notes alongside the Form 8606 records.

I never filed Form 8606 — can I reconstruct basis?

Yes, but it takes work:

1. Pull your old tax returns. Form 8606 was filed separately from your 1040. If you did file it, your prior-year returns will have it.
2. Request an IRS transcript. Form 4506-T lets you pull wage and income transcripts and account transcripts going back to 1990. If you filed Form 8606 in the past, the IRS has it on record.
3. Find bank/brokerage records. IRA contribution confirmations and year-end statements from your custodian show when and how much you contributed. Cross-reference with your tax records for years where you couldn't deduct.
4. File late Form 8606s. You can file Form 8606 for prior years to establish basis retroactively. The $50 penalty per year may apply, but it's far less expensive than double-taxing years of contributions. A CPA familiar with IRA basis reconstruction is worth the fee here.

Non-deductible IRA vs. taxable brokerage: which is better?

If you can't deduct IRA contributions and you're blocked from Roth IRA directly (income too high), is a non-deductible traditional IRA even worth it?

Usually no — unless you're immediately converting to Roth (backdoor Roth). Here's why:

• In a taxable brokerage account, long-term capital gains and qualified dividends are taxed at 0–20% federal rates
• In a non-deductible traditional IRA, growth eventually comes out as ordinary income (up to 37%)
• The IRA has no step-up in basis at death; a brokerage account does
• The IRA adds Form 8606 tracking complexity forever

The only reason to make a non-deductible traditional IRA contribution without immediately converting is if you expect to do a backdoor Roth in a later year (once you clear the IRA pool of pre-tax dollars via a reverse rollover), or if you need the IRA for other strategic reasons. Otherwise, a taxable brokerage account usually wins for money above the Roth income limit.

Common Form 8606 mistakes

1. Never filing Form 8606. No form = no documented basis = you pay tax twice. This is the most common and most expensive mistake.
2. Thinking basis is per-account. IRA basis is aggregate across all your traditional, SEP, and SIMPLE IRAs, no matter how many institutions hold them. You can't point to one account and say "that's the after-tax account."
3. Rolling a 401(k) to a traditional IRA without checking backdoor Roth impact. If you're above the Roth income limit and rely on backdoor Roth contributions, a large traditional IRA rollover triggers the pro-rata rule and may cost thousands per year.
4. Not updating basis after a partial Roth conversion. Each conversion uses up some basis. If you convert $30,000 when your basis fraction is 15%, you recover $4,500 of basis — your remaining basis drops from, say, $30,000 to $25,500. Form 8606 Part II tracks this automatically, but only if you file it.
5. Forgetting to file Form 8606 in distribution years. If you take a distribution from a traditional IRA that has any basis, you must file Part III that year or lose the basis recovery for that distribution.
6. Assuming inherited IRA basis is zero. If you inherit a traditional IRA, ask the estate's executor whether the decedent had any Form 8606 basis. If they did, it transfers to you.

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