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Last Updated :
Dec 5, 2025
Dec 5, 2025
Form 8606 Guide: How to Report Nondeductible IRAs and Track Your Basis
For startup founders navigating the complexities of personal and business finances, understanding Form 8606 (Nondeductible IRAs) is crucial. This form plays a key role in tracking your after-tax retirement savings, which is called your tax basis.
If you fail to file Form 8606 when required, you risk paying income tax twice on the same retirement funds. Proper tracking ensures that when you eventually withdraw those funds, the basis amount (the money already taxed) is tax-free.
What is Form 8606?
Form 8606 serves a specialized purpose: it reports nondeductible contributions to traditional IRAs and calculates the taxable portion when you receive distributions.
Unlike deductible IRA contributions, nondeductible contributions are made with after-tax dollars. The form’s structure is designed to follow this money through your accounts over time.
Who Must File Form 8606 and When Is It Due?
You must file Form 8606 for 2024 if any of the following apply to you:
Nondeductible Contributions: You made nondeductible contributions to a traditional IRA for 2024.
Distributions with Basis: You took distributions from a traditional, SEP, or SIMPLE IRA in 2024, and you have (or have ever had) nondeductible traditional IRA contributions.
Roth Conversions: You converted any amount from a traditional, SEP, or SIMPLE IRA to a Roth IRA in 2024.
Roth Distributions: You took a distribution from a Roth IRA in 2024.
When to File: Form 8606 must be attached to your Form 1040, 1040-SR, or 1040-NR. It is due by the tax return deadline (typically April 15th, or the extended deadline if you file an extension).
Step-by-Step Guide: How to Fill Out Form 8606
Form 8606 is divided into three parts, based on the specific IRA activity you need to report.
Part I: Nondeductible Traditional IRAs
Complete this part if you made nondeductible traditional IRA contributions for 2024 or if you received distributions from traditional IRAs and have unrecovered basis.
Line | Action | Founder Guidance |
Line 1 | Enter your nondeductible contributions for 2024. | This is the amount you contributed that you cannot deduct on Form 1040. |
Line 2 | Enter your total basis from 2023. | This is the basis amount carried over from your 2023 Form 8606, line 14. If you never filed before, enter zero. |
Line 7 | Enter the fair market value of all traditional IRAs on December 31, 2024. | This figure is critical for the Pro-Rata Rule calculation and must be accurate as of the last day of the year. |
Line 10 | Enter total traditional IRA distributions received in 2024. | Do not include rollovers or certain repayments in this figure. |
Line 13 | Taxable amount of the distribution. | This amount is calculated by the form based on the Pro-Rata Rule (explained below) and is generally included on your Form 1040, line 4b. |
Line 14 | Unrecovered Basis for 2025. | This is the remaining after-tax amount you carry forward to next year's return. |
Understanding the Pro-Rata Rule
The Pro-Rata Rule (or Annuity Rule) dictates that when you take a distribution from a traditional IRA, the withdrawal is treated as coming proportionally from both the taxable (deductible) and non-taxable (nondeductible) portions of all your traditional IRAs.
The ratio is determined by comparing your total unrecovered basis (Line 5) to the total value of all your traditional IRAs (Line 7).
Part II: Conversions from Traditional IRAs to Roth IRAs
Complete this part if you performed a Roth Conversion in 2024 (e.g., the "Backdoor Roth" strategy).
Line | Action | Founder Guidance |
Line 15c | Enter the basis amount used for the conversion. | This is the non-taxable portion of your IRA used for the conversion, calculated using Line 9 of the form. |
Line 16 | Enter the total conversion amount in 2024. | This is the total value of the traditional IRA funds converted to a Roth IRA. |
Line 17 | Taxable amount of the conversion. | This is the conversion amount (Line 16) minus the non-taxable basis (Line 15c). This amount is generally taxed as ordinary income and included on Form 1040, line 4b. |
Founder Tip: Using the "Backdoor Roth" strategy requires careful planning. If you have any money in a pre-tax traditional, SEP, or SIMPLE IRA (known as pre-tax dollars), the Pro-Rata Rule applies to the conversion, making part of the converted amount immediately taxable.
Part III: Distributions from Roth IRAs
Complete this part if you took a distribution from a Roth IRA. Roth distributions have an ordering rule to determine taxability.
Line | Action | Ordering Rule |
Line 20 | Enter total Roth IRA distributions received in 2024. | This is the total amount you withdrew. |
Lines 23-25 | Calculate the taxability. | The distribution comes out in this order: 1. Contributions (tax-free); 2. Conversions/Rollovers (taxable portion first); 3. Earnings (taxable). |
Line 25c | Taxable amount. | If this line is greater than zero, the amount is included on Form 1040, line 4b, and may also be subject to the 10% early withdrawal penalty on Form 5329. |
Common Mistakes and How to Avoid Them
Common Founder Mistake | Consequence | Guidance |
Failing to file Form 8606 | The IRS assumes all withdrawals are taxable, leading to double taxation on your basis amount. | File Form 8606 every year you make a nondeductible contribution or have any reportable activity. |
Ignoring the Pro-Rata Rule | Making a Roth Conversion when you have pre-tax IRA funds causes an unexpected tax bill. | Before executing a "Backdoor Roth," if you have existing traditional, SEP, or SIMPLE IRAs, either convert all of them or roll the pre-tax funds into a qualified employer plan (e.g., a 401(k)) to clear the pre-tax balance. |
Inaccurate Prior Year Basis | Mistakes in earlier years propagate. The amount on Line 2 (Prior Year Basis) must be correct. | Maintain digital and physical copies of every Form 8606 filed since your first nondeductible contribution. |
Not Reporting Special Distributions | New distributions (birth/adoption, emergency, terminal illness) have specific rules for repayment and taxation. | Be sure to check the 2024 instructions for new distributions and their repayment rules |
Founders benefit by aligning personal and business tax strategies. Coordinate personal and business tax timing, use R&D tax credit savings to bolster retirement contributions, and plan IRA reporting around key milestones.
Integrating Form 8606 Filing into Your Startup’s Tax Strategy
Founders benefit by aligning personal and business tax strategies. Form 8606 shouldn’t live in a silo:
Coordinate personal and business tax timing
Use R&D tax credit savings to bolster retirement contributions
Avoid duplicate deductions
Plan IRA reporting around exit events
For more strategies on combining IRA reporting with small business tax planning, see our 10-step guide to saving money on taxes for small businesses.
Additional Resources and Where to Go from Here
Review the IRS official instructions for Form 8606
Work with a tax advisor familiar with founder finances
Maintain digital + physical copies
Sync with finance and legal teams around milestones
FAQs
What if I forgot to file Form 8606 in a previous year?
If you took a distribution in an earlier year and forgot to report your basis, you may file an amended return (Form 1040-X) for that year along with a properly completed Form 8606 for that year. If you forgot to file for a year you made a contribution but didn't take a distribution, you can file just the missing Form 8606 attached to a current year's return.
Are traditional IRA distributions always taxable?
No. Traditional IRA distributions are only partially taxable if you have unrecovered nondeductible contributions (basis). The portion attributable to your nondeductible basis is tax-free, while the portion attributable to earnings and deductible contributions is taxable (as calculated by Part I of Form 8606).
How do I report a recharacterization?
If you converted an amount to a Roth IRA and then moved it back to a traditional IRA (recharacterization), you must report this action, generally by including a statement with your return explaining the recharacterization. If you recharacterize a contribution, you also need to use the relevant lines on Form 8606 to show that the contribution did not ultimately settle in the IRA originally intended.
For startup founders navigating the complexities of personal and business finances, understanding Form 8606 (Nondeductible IRAs) is crucial. This form plays a key role in tracking your after-tax retirement savings, which is called your tax basis.
If you fail to file Form 8606 when required, you risk paying income tax twice on the same retirement funds. Proper tracking ensures that when you eventually withdraw those funds, the basis amount (the money already taxed) is tax-free.
What is Form 8606?
Form 8606 serves a specialized purpose: it reports nondeductible contributions to traditional IRAs and calculates the taxable portion when you receive distributions.
Unlike deductible IRA contributions, nondeductible contributions are made with after-tax dollars. The form’s structure is designed to follow this money through your accounts over time.
Who Must File Form 8606 and When Is It Due?
You must file Form 8606 for 2024 if any of the following apply to you:
Nondeductible Contributions: You made nondeductible contributions to a traditional IRA for 2024.
Distributions with Basis: You took distributions from a traditional, SEP, or SIMPLE IRA in 2024, and you have (or have ever had) nondeductible traditional IRA contributions.
Roth Conversions: You converted any amount from a traditional, SEP, or SIMPLE IRA to a Roth IRA in 2024.
Roth Distributions: You took a distribution from a Roth IRA in 2024.
When to File: Form 8606 must be attached to your Form 1040, 1040-SR, or 1040-NR. It is due by the tax return deadline (typically April 15th, or the extended deadline if you file an extension).
Step-by-Step Guide: How to Fill Out Form 8606
Form 8606 is divided into three parts, based on the specific IRA activity you need to report.
Part I: Nondeductible Traditional IRAs
Complete this part if you made nondeductible traditional IRA contributions for 2024 or if you received distributions from traditional IRAs and have unrecovered basis.
Line | Action | Founder Guidance |
Line 1 | Enter your nondeductible contributions for 2024. | This is the amount you contributed that you cannot deduct on Form 1040. |
Line 2 | Enter your total basis from 2023. | This is the basis amount carried over from your 2023 Form 8606, line 14. If you never filed before, enter zero. |
Line 7 | Enter the fair market value of all traditional IRAs on December 31, 2024. | This figure is critical for the Pro-Rata Rule calculation and must be accurate as of the last day of the year. |
Line 10 | Enter total traditional IRA distributions received in 2024. | Do not include rollovers or certain repayments in this figure. |
Line 13 | Taxable amount of the distribution. | This amount is calculated by the form based on the Pro-Rata Rule (explained below) and is generally included on your Form 1040, line 4b. |
Line 14 | Unrecovered Basis for 2025. | This is the remaining after-tax amount you carry forward to next year's return. |
Understanding the Pro-Rata Rule
The Pro-Rata Rule (or Annuity Rule) dictates that when you take a distribution from a traditional IRA, the withdrawal is treated as coming proportionally from both the taxable (deductible) and non-taxable (nondeductible) portions of all your traditional IRAs.
The ratio is determined by comparing your total unrecovered basis (Line 5) to the total value of all your traditional IRAs (Line 7).
Part II: Conversions from Traditional IRAs to Roth IRAs
Complete this part if you performed a Roth Conversion in 2024 (e.g., the "Backdoor Roth" strategy).
Line | Action | Founder Guidance |
Line 15c | Enter the basis amount used for the conversion. | This is the non-taxable portion of your IRA used for the conversion, calculated using Line 9 of the form. |
Line 16 | Enter the total conversion amount in 2024. | This is the total value of the traditional IRA funds converted to a Roth IRA. |
Line 17 | Taxable amount of the conversion. | This is the conversion amount (Line 16) minus the non-taxable basis (Line 15c). This amount is generally taxed as ordinary income and included on Form 1040, line 4b. |
Founder Tip: Using the "Backdoor Roth" strategy requires careful planning. If you have any money in a pre-tax traditional, SEP, or SIMPLE IRA (known as pre-tax dollars), the Pro-Rata Rule applies to the conversion, making part of the converted amount immediately taxable.
Part III: Distributions from Roth IRAs
Complete this part if you took a distribution from a Roth IRA. Roth distributions have an ordering rule to determine taxability.
Line | Action | Ordering Rule |
Line 20 | Enter total Roth IRA distributions received in 2024. | This is the total amount you withdrew. |
Lines 23-25 | Calculate the taxability. | The distribution comes out in this order: 1. Contributions (tax-free); 2. Conversions/Rollovers (taxable portion first); 3. Earnings (taxable). |
Line 25c | Taxable amount. | If this line is greater than zero, the amount is included on Form 1040, line 4b, and may also be subject to the 10% early withdrawal penalty on Form 5329. |
Common Mistakes and How to Avoid Them
Common Founder Mistake | Consequence | Guidance |
Failing to file Form 8606 | The IRS assumes all withdrawals are taxable, leading to double taxation on your basis amount. | File Form 8606 every year you make a nondeductible contribution or have any reportable activity. |
Ignoring the Pro-Rata Rule | Making a Roth Conversion when you have pre-tax IRA funds causes an unexpected tax bill. | Before executing a "Backdoor Roth," if you have existing traditional, SEP, or SIMPLE IRAs, either convert all of them or roll the pre-tax funds into a qualified employer plan (e.g., a 401(k)) to clear the pre-tax balance. |
Inaccurate Prior Year Basis | Mistakes in earlier years propagate. The amount on Line 2 (Prior Year Basis) must be correct. | Maintain digital and physical copies of every Form 8606 filed since your first nondeductible contribution. |
Not Reporting Special Distributions | New distributions (birth/adoption, emergency, terminal illness) have specific rules for repayment and taxation. | Be sure to check the 2024 instructions for new distributions and their repayment rules |
Founders benefit by aligning personal and business tax strategies. Coordinate personal and business tax timing, use R&D tax credit savings to bolster retirement contributions, and plan IRA reporting around key milestones.
Integrating Form 8606 Filing into Your Startup’s Tax Strategy
Founders benefit by aligning personal and business tax strategies. Form 8606 shouldn’t live in a silo:
Coordinate personal and business tax timing
Use R&D tax credit savings to bolster retirement contributions
Avoid duplicate deductions
Plan IRA reporting around exit events
For more strategies on combining IRA reporting with small business tax planning, see our 10-step guide to saving money on taxes for small businesses.
Additional Resources and Where to Go from Here
Review the IRS official instructions for Form 8606
Work with a tax advisor familiar with founder finances
Maintain digital + physical copies
Sync with finance and legal teams around milestones
FAQs
What if I forgot to file Form 8606 in a previous year?
If you took a distribution in an earlier year and forgot to report your basis, you may file an amended return (Form 1040-X) for that year along with a properly completed Form 8606 for that year. If you forgot to file for a year you made a contribution but didn't take a distribution, you can file just the missing Form 8606 attached to a current year's return.
Are traditional IRA distributions always taxable?
No. Traditional IRA distributions are only partially taxable if you have unrecovered nondeductible contributions (basis). The portion attributable to your nondeductible basis is tax-free, while the portion attributable to earnings and deductible contributions is taxable (as calculated by Part I of Form 8606).
How do I report a recharacterization?
If you converted an amount to a Roth IRA and then moved it back to a traditional IRA (recharacterization), you must report this action, generally by including a statement with your return explaining the recharacterization. If you recharacterize a contribution, you also need to use the relevant lines on Form 8606 to show that the contribution did not ultimately settle in the IRA originally intended.
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This article was co-written by: