IRA Basis and Roth Treatment

Every dollar inside a traditional IRA is either pre-tax (deductible contributions and earnings) or after-tax (basis). Basis is built from nondeductible contributions and from nontaxable amounts rolled over from a qualified plan, reduced by nontaxable distributions already taken. The taxpayer tracks it on Form 8606, which is the form used to report nondeductible contributions to traditional IRAs. Deductible contributions never enter basis.

Contributions face a ceiling before deductibility even matters: for 2025 the most that can go into a traditional IRA is generally the smaller of $7,000 ($8,000 if age 50 or older by year-end) and taxable compensation. Whether that contribution can be deducted is a second test — coverage by an employer retirement plan, filing status, and modified AGI phase the deduction out, figured on Worksheet 1-2 — and anything contributed above the ceiling is an excess contribution taxed at 6% for each year it stays in the account.

A traditional IRA distribution with no basis behind it is fully taxable ordinary income. When basis exists, every distribution is part taxable and part not: each payment carries out a proportional share of basis alongside taxable money, until all basis has been distributed. The taxpayer figures the split on Form 8606 whenever a distribution arrives in a year with basis on record. The split looks across every account at once: all of the owner's traditional IRAs are treated as one, so taking money out of one account while basis sits in another does not isolate the tax-free share. Taking a second distribution does not change the method; it repeats the same proportional split against whatever basis remains.

The two accounts answer the same two questions oppositely. On tax, the traditional distribution defaults to ordinary income with basis as the only tax-free part, while the Roth distribution defaults to no tax once it is a qualified distribution. A distribution is qualified only when two prongs hold together: it is made after the 5-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for the owner's benefit, and the payment is tied to reaching age 59 1/2, disability, death (paid to a beneficiary or the estate), or a first-home exception capped at a $10,000 lifetime limit. A distribution missing either prong is nonqualified and falls to the ordering rules, which treat contributions and earnings as distributed in a set order, so only part of a nonqualified distribution may be taxable. On timing, the traditional owner must begin required minimum distributions by April 1 of the year following the year of reaching age 73, while the original Roth owner faces no lifetime requirement. A beneficiary of either account follows beneficiary rules instead; a Roth beneficiary in particular may have to take distributions.