Hello, I am just looking for confirmation that I am understanding the full tax implications of a Backdoor Roth IRA conversion and then correctly calculating the basis.
For simplicity, I am just going to use a hypothetical $1,000 as my annual contribution (yes, I am aware of contribution limits). The following would be a breakdown of calendar-year contributions, conversions, and recharacterizations from the past few years.
2020: $1,000 contributed directly to Roth IRA
2021: $1,000 contributed directly to Roth IRA
2022: Traditional IRA opened for Backdoor Roth conversion. $1,000 contributed to Traditional IRA and converted to Roth IRA. Also, $500 of the 2021 contribution was recharacterized.
2023: $1,000 to Trad IRA and converted to Roth
2024: $1,000 to Trad IRA and converted to Roth.
In summary, since the accounts were opened, I would have contributed a total of $5,000, broken down as follows: $1,500 directly to the Roth, $500 being recharacterized, and $3,000 converted from Trad to Roth.
To my understanding (and please let me know if I am misspeaking), all Roth IRA contributions are post-tax, resulting in tax-free growth. The backdoor Roth conversion gets around the income limits by making non-tax-deductible contributions to a Trad IRA, and then taking advantage of no income limits on conversions to a Roth.
My last question is how to both calculate, and report, the basis for my Roth IRA. Because all of the contributions, either directly to the Roth, or via conversion or recharacterization, are post-tax, my basis would equal my total contributions? So $5,000? And how do I report this when doing my tax return via TurboTax (Deluxe desktop version)... is it just the basis for the 2024 tax year contributions ($1,000), or the cumulative total of all contributions to this Roth IRA ($5,000)? Lastly, can someone please explain to me in Lamens terms what a basis is for?
Thanks in advance for any help with bettering my understanding of this tax strategy!
