Here's the short version. Your spouse inherited an IRA (Individual Retirement Arrangement), took a required withdrawal, and the tax form looks confusing. You spotted a "basis" number in the Schwab account and you're hoping it means part of the withdrawal is tax-free. Most likely, it doesn't.
The word "basis" is doing double duty here, and that's the whole problem. The "basis" you see next to the investments in a Schwab account is the cost basis — what was paid for each share of stock or each fund. Inside a traditional IRA, that number is irrelevant for taxes. It does nothing. The "basis" that actually makes part of a withdrawal tax-free is a completely different thing: nondeductible contributions the original owner made with money they'd already paid taxes on.
That second kind of basis only exists if the original owner deliberately put after-tax money into the IRA and reported it on a special form. If they never did that — and most people never did — then the full Required Minimum Distribution (RMD) is taxable. Let's walk through why, so you can figure out which situation you're actually in.
How money goes into a traditional IRA
A traditional IRA holds money two possible ways, and the difference is everything.
The normal way is pre-tax. You contribute money and take a tax deduction that same year. The IRS lets the money grow untouched for decades. Then, when you withdraw it in retirement, you pay ordinary income tax on every dollar. You got the tax break going in, so you pay tax coming out. That's the deal, and it covers the vast majority of traditional IRA money in America.
The less common way is nondeductible. Sometimes a person earns too much to deduct an IRA contribution, or they simply choose not to. They put money in but take no deduction. That money was already taxed once. The IRS won't tax it a second time when it comes out. So this slice of the account becomes tax-free on withdrawal. This after-tax slice is what "IRA basis" really means.
The catch: the IRS doesn't track nondeductible contributions for you. The owner has to report each one on Form 8606 in the year they made it. That form is the only official record that any tax-free basis exists. No Form 8606, no basis. It's that simple.
"IRA basis" vs. "investment cost basis" — the crucial distinction
This is where almost everyone gets tripped up, so read this part twice.
When you log into Schwab and see a "basis" or "cost basis" column, you're looking at what was paid for the investments. If the IRA bought 100 shares at $50, the cost basis is $5,000. Brokerages show this number for every account out of habit. In a taxable brokerage account, cost basis matters a lot — it's how you calculate capital gains when you sell.
But this is an IRA. Inside an IRA, cost basis is meaningless for your taxes. The IRA is a tax shelter. Buying and selling investments inside it triggers no tax. The only thing that gets taxed is money leaving the account. And when money leaves a traditional IRA, the cost basis of the shares has zero effect on how much is taxable.
So the $5,000 "basis" you see in Schwab tells you nothing about whether your RMD is taxable. It's the wrong basis. The basis that matters — nondeductible contributions on Form 8606 — never shows up in a brokerage account view. It lives only on old tax returns. If you've been pinning your hopes on that Schwab number, that's the misunderstanding to let go of.
Here are the two "basis" concepts side by side:
| IRA basis (Form 8606) | Investment cost basis (Schwab) | |
|---|---|---|
| What it is | After-tax money: nondeductible contributions the owner already paid tax on | What was paid to buy each share or fund inside the account |
| Where it shows up | Only on filed Form 8606s and old tax returns | In the brokerage account's "cost basis" column |
| Affects RMD taxability? | Yes — it's the only thing that makes part of a withdrawal tax-free | No — meaningless for taxes inside an IRA |
| Source of record | The IRS Form 8606 history | The custodian's (Schwab's) internal records |
The pro-rata rule, if real IRA basis exists
Now suppose the original owner did make nondeductible contributions and filed Form 8606. Then part of each withdrawal really is tax-free. But you don't get to pick which part. The IRS uses the pro-rata rule, which spreads the tax-free basis evenly across every dollar in the account.
Here's the formula. Take the total basis (the nondeductible contributions) and divide it by the total IRA value at year-end plus distributions taken. That fraction is the tax-free percentage of every withdrawal.
Let's run real numbers. Say the inherited IRA is worth $100,000. The original owner's Form 8606 shows $20,000 of nondeductible contributions carried over. That's $20,000 basis against a $100,000 account, or 20%.
Your spouse takes a $5,000 RMD this year. Apply the 20%:
- Tax-free portion: $5,000 × 20% = $1,000
- Taxable portion: $5,000 − $1,000 = $4,000
So $4,000 gets added to taxable income, and $1,000 comes out free. The remaining $19,000 of basis carries forward to future years. You recalculate the percentage each year, because both the basis and the account value change over time.
Why does this matter beyond a small refund? Suppose your spouse files Married Filing Jointly with $110,000 of other taxable income. In 2026 the 22% bracket for joint filers runs from $100,801 to $211,400. That extra $4,000 lands squarely in the 22% bracket, so the taxable part of the RMD costs about $880 in federal tax. If you'd wrongly treated the whole $5,000 as taxable, you'd have overpaid on that extra $1,000 — roughly $220 thrown away. Multiply that across years of RMDs and it adds up.
Form 8606 and finding the original owner's records
Form 8606 is the IRS form that tracks IRA basis. It's titled "Nondeductible IRAs," and it does three jobs: reports new nondeductible contributions, tracks the running basis total, and calculates the taxable portion of distributions.
For an inherited traditional IRA, the heir figures the taxable amount on Form 8606 Part I — the same part that handles every traditional IRA distribution when basis is involved. (Part II covers Roth conversions; Part III is "Distributions From Roth IRAs" and does not apply to a traditional IRA.) The beneficiary files a separate Form 8606 for the inherited IRA, keeping its basis distinct from any of their own IRA basis. The exact line numbers shift from year to year, so confirm against the current-year 8606 instructions or the IRS Publication 590-B worksheet before filing.
But none of that matters until you answer the threshold question: did the original owner ever have basis at all? To find out, you need their Form 8606 history. Here's where to look:
- The original owner's past tax returns. Form 8606 would be attached. The estate executor or a surviving family member may have copies.
- Their accountant or tax preparer. If they used one, that firm likely kept records and can tell you whether any 8606 was ever filed.
- The IRS directly. You can request the deceased's filed forms, though this requires proof of authority (such as executor documents). Form 8606 filings are sometimes available in the IRS's records.
If you search all three and find nothing, that's a meaningful answer. No Form 8606 on record almost certainly means there was no nondeductible basis, which means the full RMD is taxable. Don't manufacture basis out of the Schwab cost-basis number to fill the gap. That's not what it is.
What "taxable amount not determined" on the 1099-R means
The 1099-R is the tax form the custodian sends to report retirement account distributions. On it, Box 1 shows the gross amount withdrawn. Box 2a shows the taxable amount. Box 2b has a checkbox: "Taxable amount not determined."
When Schwab checks that box, it's not saying part of your money is tax-free. It's saying: we don't know the basis history, so we can't compute the taxable amount for you. Custodians check this box constantly on IRA distributions, because they have no way to know whether the original owner made nondeductible contributions years or decades ago. That history isn't in their system.
So the box checked is normal. It's not a hint and not a warning. It just hands the calculation to you. The IRS still expects a taxable amount reported on your return. Your default assumption should be that the full distribution is taxable — unless you can document basis with a Form 8606. The burden of proof is on you, not the custodian.
What to do next
Work through these steps in order:
- Hunt for the original owner's Form 8606 history. Check their old tax returns, ask their accountant, and if needed request records from the IRS. This single question — did basis ever exist? — decides everything.
- Ignore the Schwab cost-basis number. It's the investments' purchase price, not IRA basis. It plays no role in taxing the RMD.
- If you find documented basis, use Form 8606 Part I (on a separate 8606 for the inherited IRA) and the current-year instructions to apply the pro-rata rule for each distribution, and carry the remaining basis forward each year.
- If you find no basis history, treat the full RMD as taxable and report it that way.
- When in doubt, bring it to a CPA. Inherited IRA basis with a "not determined" 1099-R is exactly the kind of narrow, documentation-heavy issue where one hour of professional help pays for itself — especially given the separate-Form-8606 and pro-rata mechanics noted above.
The likeliest outcome, honestly, is that the whole RMD is taxable and there's no special tax-free portion to claim. That's disappointing but clean. The "basis" in the Schwab account was a red herring all along.