How Is an Inherited IRA With Nondeductible Basis Taxed? (w/Examples) + FAQs

This article reflects federal rules as of June 2026 and covers tax year 2025 (the 2026 filing season), with state notes where they matter. Tax law changes — confirm current figures before you file. This is educational, not personal tax advice; for a layered estate or a multi-decedent IRA, hire a CPA or tax attorney.

Quick Answer

Only the growth and pre-tax dollars are taxed — the nondeductible basis the original owner already paid tax on passes to you tax-free. For tax year 2025, you apply the pro-rata rule on a separate Form 8606, so each withdrawal is part taxable, part return of basis.

When you inherit a traditional IRA that holds nondeductible basis, you step into a small but valuable tax break: a slice of every dollar you pull out comes back to you free of income tax. The catch is that most heirs never know the basis exists, so they pay tax on money the deceased already taxed — a costly, permanent mistake that the IRS will not fix for you.

The stakes climb under the SECURE Act final regulations, which force most non-spouse heirs to empty the account within 10 years starting in 2025. Roughly one in three U.S. households owns a traditional IRA, and a meaningful share of those accounts carry untracked basis — which means real dollars are silently overtaxed every filing season.

Here is what you will learn:

🧮 How the pro-rata rule splits each distribution into a taxable and a tax-free part, with the exact math.
📄 How to file a separate Form 8606 for the inherited IRA without contaminating your own IRA basis.
⏳ How the 10-year rule and annual RMDs interact with basis for deaths after 2019.
🔍 Where to hunt down the deceased owner’s basis so you do not overpay.
🚫 The seven mistakes that cause heirs to lose the tax-free portion forever.

What “Nondeductible Basis” Means in an Inherited IRA

Basis is money that already had income tax paid on it before it went into the IRA. When the original owner contributed to a traditional IRA but could not deduct the contribution — usually because of income limits while covered by a workplace plan — that contribution became nondeductible basis. The owner was supposed to report it each year on Form 8606, which is the IRS’s running tally of after-tax money inside a pre-tax account.

Why does this matter to you, the heir? Because the government already taxed those dollars once, and it will not tax them again. When you take a distribution, the basis portion returns to you free of income tax, and only the earnings and pre-tax contributions are taxable. If you ignore the basis, you pay ordinary income tax on money that was never supposed to be taxed twice, and that overpayment is almost never recovered.

Here is the key structural rule: inherited IRA basis is tracked completely separately from your own IRA basis. Per IRS Publication 590-B, if you take distributions from both an inherited IRA and your own IRA and each has basis, you must complete separate Forms 8606. You cannot pool them, and you cannot use your own IRA’s basis to shelter the inherited account or vice versa.

A common misconception is that basis “disappears” at death or that the heir inherits a clean, fully taxable account. It does not. The basis carries over to the beneficiary intact. What the reader should do about it: before taking a single dollar, find the decedent’s last filed Form 8606 (or their final tax return) and confirm the basis figure on line 14, then keep that document forever.

Which Situation Applies to You?

The tax treatment of an inherited IRA with basis depends heavily on who you are relative to the deceased. Use this branch to find your path before reading the math sections.

You are the surviving spouse. You have the most options. You can roll the IRA into your own IRA (treat it as your own), which merges the inherited basis into your own Form 8606 and lets you use it across all your IRAs. Or you can keep it as an inherited IRA and track its basis separately. Choosing the rollover changes how the pro-rata rule applies — see the spouse example below.
You are a non-spouse “designated beneficiary” (most adult children, siblings, friends). You generally cannot roll it over or convert it to a Roth. You keep it as an inherited IRA, track basis on a separate Form 8606, and you are usually subject to the 10-year rule.
You are an “eligible designated beneficiary” (minor child of the owner, disabled or chronically ill person, someone not more than 10 years younger than the owner). You may still stretch distributions over your life expectancy, and basis applies pro-rata to each withdrawal.
You inherited from more than one person, or you inherited and have your own basis. You must keep a distinct Form 8606 for each inherited IRA from each decedent, plus your own — they never combine.

The reason this branching matters is that the form mechanics and the withdrawal deadline differ by category, even though the underlying pro-rata math is the same. Pick your branch, then apply the worked examples that follow.

The Pro-Rata Rule: How the Tax-Free Part Is Calculated

The pro-rata rule is the heart of the answer. It says you cannot cherry-pick and withdraw only the tax-free basis while leaving the taxable earnings behind. Instead, every distribution is treated as a proportional mix of basis and pre-tax money, based on the ratio of basis to the total account value.

The formula, worked on Form 8606, is straightforward once you see it:

[ \text{Nontaxable portion} = \text{Distribution} \times \frac{\text{Basis}}{\text{Year-end value} + \text{Distribution}} ]

The denominator uses the account’s December 31 value plus the distributions you took during the year, so the ratio reflects the full account. The FI Tax Guy’s pro-rata explainer walks through this same mechanic in plain terms. The consequence of getting the denominator wrong is that you either overstate the tax-free amount (inviting an IRS adjustment) or understate it (overpaying tax).

A frequent misconception is that the percentages are locked in forever. They are not — the basis is a fixed dollar amount, but the ratio shifts every year as the account grows or shrinks and as you withdraw. What the reader should do: recompute the fraction on a fresh Form 8606 every year you take a distribution, carrying the remaining basis forward from line 14 of the prior year’s form.

Why You Cannot Withdraw “Just the Basis”

Many heirs assume they can pull out exactly the basis amount tax-free and stop there. The pro-rata rule blocks this. Because the IRS treats the account as one blended pool, any withdrawal automatically includes a proportional share of taxable earnings. The consequence of believing otherwise is a surprise tax bill, since the part you thought was tax-free was only partly tax-free. The fix is to run the fraction first and expect that most of a large account’s value will be taxable when basis is small relative to the total.

Worked Example: The Core Math

Let’s make it concrete with real dollars for tax year 2025.

Maria inherits a traditional IRA from her father. His final Form 8606 shows $30,000 of nondeductible basis. At the time Maria takes her first distribution, the inherited IRA is worth $120,000. In 2025 she withdraws $20,000, and the December 31, 2025 balance is $104,000.

Step by step on her separate “Inherited” Form 8606:

Basis (line 2 carried in): $30,000
Distribution during the year (line 7): $20,000
Year-end value (line 6): $104,000
Denominator = $104,000 + $20,000 = $124,000
Nontaxable fraction = $30,000 ÷ $124,000 = 0.2419 (24.19%)
Nontaxable portion of the $20,000 = $20,000 × 0.2419 = $4,839
Taxable portion = $20,000 − $4,839 = $15,161

So Maria reports $15,161 as taxable income, not the full $20,000. At a 24% marginal rate, that saves her about $1,161 in federal tax this year alone. Her remaining basis carries to the next year: $30,000 − $4,839 = $25,161, which she records on line 14 to use in 2026.

The lesson: had Maria not known about the basis, she would have reported the full $20,000 and overpaid. Over a 10-year drawdown, ignoring a $30,000 basis can cost an heir several thousand dollars in needless tax.

The 10-Year Rule and Annual RMDs (Deaths After 2019)

For most non-spouse heirs of owners who died after 2019, the SECURE Act final regulations require the entire inherited IRA to be emptied by the end of the 10th year after the year of death. This is separate from, and layered on top of, the basis math.

Whether you also owe an annual required minimum distribution (RMD) during years 1–9 depends on the decedent’s age at death:

If the owner died before their required beginning date (before RMDs had started), you owe no annual RMD — you can wait and empty the account any time through year 10.
If the owner died on or after their required beginning date (RMDs had begun), you must take an annual RMD in years 1 through 9 using the IRS Single Life Expectancy Table, then fully empty the account by year 10.

The IRS waived penalties for missed annual RMDs from 2020 through 2024, but enforcement resumed in 2025. The consequence of skipping a required annual RMD is steep: a 25% excise tax on the amount you should have taken, reduced to 10% if you correct it within two years and file Form 5329. What the reader should do: confirm the decedent’s age at death now, calendar the year-10 deadline, and take at least the RMD each year so basis is also being recovered along the way.

A common misconception is that the 10-year rule changes the taxation of the money. It does not — it changes the timing. The pro-rata rule still decides how much of each forced withdrawal is tax-free.

Filing Form 8606 for an Inherited IRA, Line by Line

Form 8606 is the only place the IRS lets you claim the tax-free basis. Skipping it means the full distribution shows up as taxable on your 1099-R and your return. Here is how to handle the inherited account correctly.

First, write “Inherited” at the top of the Form 8606 you prepare for the inherited IRA, and keep it physically separate from your own Form 8606. As confirmed across Bogleheads guidance, owned and inherited basis are totally separate and require their own forms. The consequence of combining them is an incorrect taxable amount on both accounts.

Key lines for tax year 2025 (Part I):

Line 2 — your basis carried in (the decedent’s remaining basis the first year, then your own line 14 carryforward after that).
Line 6 — the December 31 value of the inherited traditional IRA only.
Line 7 — distributions you took from the inherited IRA this year.
Line 8–13 — the pro-rata calculation that produces the nontaxable amount.
Line 13 — your nontaxable distribution, which reduces the taxable amount you report on Form 1040.
Line 14 — your remaining basis to carry to next year. Save this number.

Where and when: file Form 8606 with your Form 1040 by the April deadline (including extensions). Per Forbes’ guide for IRA heirs, if you are not required to file a return, you must still file Form 8606 by itself, signed, by the deadline. Many tax programs cannot generate a second “Inherited” 8606 automatically, so you may need to prepare it manually and override box 2a on the 1099-R entry — a step described in TurboTax community guidance.

Three Common Scenarios

Scenario 1 — Non-Spouse Heir With Known Basis

If you do this	Here is the tax result
File a separate “Inherited” Form 8606 and run the pro-rata math	Each distribution is part tax-free; you recover the basis over the 10 years
Take distributions but never file Form 8606	The entire 1099-R amount is taxed; the tax-free basis is lost

Scenario 2 — Surviving Spouse Who Rolls Over

If you do this	Here is the tax result
Treat the IRA as your own and merge the basis onto your own Form 8606	Basis applies across all your IRAs under one pro-rata calculation
Keep it as an inherited IRA instead	Basis stays separate; you lose the option to convert to Roth

Scenario 3 — Heir of an Owner Past RMD Age

If you do this	Here is the tax result
Take the annual RMD in years 1–9 and empty by year 10	You avoid the excise penalty and recover basis steadily each year
Skip the annual RMD	A 25% excise tax applies (10% if fixed within two years via Form 5329)

Named Examples

James, the overlooked-basis heir. James inherits his mother’s $200,000 traditional IRA in 2025. He almost reports his first $25,000 withdrawal as fully taxable. Digging through her files, he finds her last Form 8606 showing $40,000 of basis. Running the math on a separate Inherited 8606, about $5,000 of his withdrawal comes back tax-free, saving him roughly $1,100 at a 22% rate — and he repeats the process each year.

Linda, the surviving spouse. Linda inherits her husband’s IRA holding $50,000 of basis. Because she is a spouse, she rolls it into her own IRA. The $50,000 basis joins the $20,000 she already had, so all $70,000 now shelters distributions across her combined IRAs on one Form 8606. She gives up nothing because she has no plan to leave it as inherited.

Robert, the two-decedent heir. Robert inherits one traditional IRA from his father (with $30,000 basis) and another from his aunt (with no basis). Following IRS Pub 590-B, he keeps a separate Inherited Form 8606 only for his father’s account; his aunt’s IRA is fully taxable and never appears on an 8606. He never combines the two, nor mixes in his own IRA.

Mistakes to Avoid

Not filing Form 8606 at all. The IRS taxes the full distribution, and the tax-free basis is permanently lost.
Combining inherited basis with your own IRA basis. This produces wrong taxable amounts on both and can trigger an IRS notice.
Combining two inherited IRAs from different decedents. Each needs its own separate Form 8606; merging them misstates tax on both.
Assuming you can withdraw only the basis tax-free. The pro-rata rule forces a taxable share into every withdrawal; expecting otherwise creates a surprise bill.
Skipping the annual RMD when the owner died past RMD age. A 25% excise tax hits the shortfall, reduced to 10% only if corrected within two years.
Missing the year-10 full-distribution deadline. The remaining balance becomes a forced, often large, taxable event in one year, spiking your bracket.
Discarding the decedent’s old Form 8606. Without proof of basis, you cannot defend the tax-free portion if the IRS questions it.
Converting an inherited traditional IRA to a Roth. Non-spouse heirs cannot do this; attempting it creates an excess contribution and penalties.

Do’s and Don’ts

Do’s

Do find and keep the decedent’s final Form 8606 — it is your proof of basis and the IRS rarely has it.
Do label the inherited Form 8606 “Inherited” so it stays distinct from your own.
Do recompute the pro-rata fraction every year you take money out, because the ratio shifts.
Do calendar the year-10 deadline and any annual RMD to avoid the excise tax.
Do consider spreading withdrawals across the 10 years to smooth your tax bracket and recover basis steadily.

Don’ts

Don’t pool inherited and personal IRA basis — the law requires separate tracking.
Don’t assume the account is fully taxable; check for basis first or you overpay.
Don’t try to roll over or Roth-convert an inherited IRA if you are a non-spouse, because it is not allowed.
Don’t wait until year 10 if the owner died past RMD age, since annual RMDs are required in the meantime.
Don’t throw away your line 14 carryforward number — you need it next year.

Pros and Cons of Tracking Inherited IRA Basis

Pros

Real tax savings — a portion of every withdrawal escapes income tax, often thousands over a decade.
Bracket control — recovering basis steadily can keep you out of a higher tax bracket.
Audit protection — keeping the records means you can defend the tax-free portion if questioned.
Honors the original tax already paid — you avoid double taxation on the same dollars.
Carries forward cleanly — once set up, the line 14 carryforward makes each year simple.

Cons

Recordkeeping burden — you must file a separate Form 8606 every distribution year.
Software limitations — many programs do not handle a second inherited 8606 well, forcing manual work.
Easy to get wrong — the pro-rata denominator and separate tracking trip up many filers.
Small benefit if basis is tiny — a low basis relative to a large account yields modest tax-free amounts.
No Roth conversion option — non-spouse heirs cannot move the basis into tax-free Roth growth.

Federal vs. State Treatment

Start with the federal rule, then check your state, because states do not automatically follow federal IRA basis treatment.

Federal rule (tax year 2025)	State considerations
Pro-rata basis recovery on Form 8606; only earnings taxed	Most states that tax income start from federal AGI, so the federal tax-free portion usually flows through
10-year rule and annual RMD penalties apply	States with no income tax (e.g., Florida, Texas, Tennessee) do not tax the distribution at all

In a state with no income tax, the basis question only affects your federal return, and the state portion is simply zero. In states that tax retirement income, most begin from federal adjusted gross income, so the basis you exclude federally is generally excluded for the state too — but a handful of states have their own retirement-income exclusions or different starting points. Check your state’s department of revenue page, because guessing here can cost you. If you live in a state with its own IRA rules, confirm conformity with a local preparer before filing.

What to Do Next

Locate the decedent’s last Form 8606 (or final tax return) and read line 14 to confirm the basis amount.
Confirm the decedent’s age at death to know whether you owe an annual RMD during years 1–9.
Set up a separate “Inherited” Form 8606 and gather the inherited IRA’s December 31 value and your distribution amounts.
Run the pro-rata math for each distribution year and report only the taxable portion on your Form 1040.
Calendar the year-10 deadline and each annual RMD; file Form 5329 if you ever miss one.
Save every year’s line 14 carryforward in a permanent file for your heirs.
Call a CPA or tax attorney if you inherited from multiple decedents, the basis records are missing, or a trust is the beneficiary — this is where mistakes get expensive.

Frequently Asked Questions

Do I have to pay tax on an inherited traditional IRA? Yes, on the pre-tax portion. For tax year 2025, distributions are ordinary income except for any nondeductible basis, which you recover tax-free under the pro-rata rule on a separate Form 8606.

How do I find the basis in an inherited IRA? Check the decedent’s last filed Form 8606, line 14. If none exists, review their final tax returns for nondeductible contributions. Without records, the IRS treats the account as fully taxable.

Can I combine inherited IRA basis with my own IRA basis? No. Per IRS Publication 590-B, inherited and owned basis are tracked on separate Forms 8606. Combining them produces an incorrect taxable amount on both accounts.

Does the basis pass to me tax-free when I inherit the IRA? Yes. The nondeductible basis carries over to you intact, and that portion of each distribution returns tax-free. Only the earnings and pre-tax contributions are taxable.

Do I file a separate Form 8606 for the inherited IRA? Yes. Prepare a distinct Form 8606 marked “Inherited” and keep it separate from your own. File it with your Form 1040 by the April deadline, including extensions.

How does the 10-year rule affect taxation of the basis? It changes timing, not taxation. You must empty the account by year 10, but the pro-rata rule still decides how much of each withdrawal is tax-free.

Do I owe an annual RMD on an inherited IRA? It depends on the owner’s age at death. If they died after their required beginning date, yes — annual RMDs apply in years 1–9, with enforcement resuming in 2025.

What is the penalty for missing an inherited IRA RMD? 25% of the amount not taken, for 2025. It drops to 10% if you withdraw the shortfall within two years and file Form 5329; the IRS may waive it for reasonable cause.

Can a non-spouse beneficiary convert an inherited IRA to a Roth? No. Only a surviving spouse who treats the IRA as their own can convert. Non-spouse heirs cannot roll over or Roth-convert an inherited traditional IRA.

What happens if I forget to claim the basis? You overpay tax permanently. The full distribution is taxed as income, and the tax-free basis is generally lost unless you amend the return within the refund window.

Does my state tax the inherited IRA distribution? It varies. No-income-tax states tax none of it. Most income-tax states start from federal AGI, so the federal tax-free portion usually carries over — confirm with your state’s revenue agency.

Can I withdraw only the tax-free basis and leave the rest? No. The pro-rata rule blends basis and earnings, so every withdrawal includes a proportional taxable share. You cannot isolate and remove only the basis.

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