Tax-Deferred Asset Basis Tracking

How after-tax contributions are tracked in traditional IRAs and 401(k)s

How it works

Tax-deferred accounts (Traditional IRA, 401k) track basis from after-tax contributions separately. Most contributions are pre-tax (no basis), but non-deductible IRA contributions create basis. Upon withdrawal, basis is returned tax-free.

  1. 1. Basis Stays Constant

    Unlike taxable accounts, basis does not grow with the account value

    Future Basis = Initial Basis (unchanged)
    Example: $10k non-deductible IRA contributions remain $10k basis even as account grows to $50k

  2. 2. Taxable Portion of Withdrawals

    Pro-rata rule: each withdrawal is partially taxable and partially tax-free (return of basis)

    Taxable % = (Total Value - Total Basis) / Total Value
Taxable Amount = Withdrawal × Taxable %
    Example: $50k IRA with $10k basis → 80% taxable. $25k withdrawal → $20k taxable, $5k tax-free

  3. 3. Basis Depletion

    Each withdrawal reduces remaining basis proportionally

    Remaining Basis = Previous Basis × (1 - Withdrawal % of Account)
    Example: $10k basis, $25k withdrawal from $50k account (50% withdrawn) → $5k basis remains

Real-world context

IRA Aggregation Rule

The IRS requires aggregating all traditional IRAs when calculating the taxable portion of withdrawals. You cannot withdraw only from the IRA containing basis to avoid taxes — all traditional IRAs are treated as a single aggregated pool.

IRS reference: Publication 590-B - Distributions from IRAs

After-Tax 401(k) Contributions

Some 401k plans allow after-tax contributions beyond the normal pre-tax limit. These create basis and can be converted to Roth (mega backdoor Roth strategy). Stratum tracks these separately.

What drives the result

Initial Basis
Assets tab → Tax-Deferred Assets

Represents after-tax contributions. Higher basis = less taxable on withdrawal.

$10k basis in $100k IRA means 10% of withdrawals are tax-free return of basis

Non-Deductible IRA Contributions
Base Data → Contributions

Increases basis in tax-deferred accounts annually

$7k non-deductible IRA contribution each year builds up basis over time

Roth Conversion Amounts
Strategies → Roth Conversion

Reduces tax-deferred account balance and proportionally reduces basis (same pro-rata treatment as ordinary withdrawals)

Converting 50% of IRA also transfers 50% of basis to Roth (tax-free)

Assumptions

  • Most contributions are pre-tax (401k deferrals, deductible IRA contributions)
  • After-tax basis only exists from non-deductible IRA contributions
  • All tax-deferred accounts aggregated (IRA aggregation rule)
  • Pro-rata rule applied uniformly across all withdrawals
  • Roth conversions reduce both balance and basis proportionally via the same pro-rata rule as ordinary withdrawals

Limitations

  • Does not track Form 8606 basis separately by account
  • Assumes no outstanding loans from 401k plans
  • Does not model qualified vs non-qualified distributions from 401k

Related

This page explains how Stratum models this calculation. It is educational material for financial professionals, not tax or legal advice, and tax law changes. Verify current figures against primary IRS sources before relying on them with a client.