Tracking IRA basis after age 59 ½.

[OrdAandM1979]

Hello Turbo Tax family!

I am 59 ½ years old (will be 60 in a few months) and wanted to ask about tracking IRA basis.

I am still working a 40+ hour a week job. Since my AGI exceeds the IRS limit to contribute to a Roth IRA, I started making annual Traditional IRA conversions to my Roth IRA (i.e. back door contributions). 

Q1 – Each year I make a lump sum non-deductible contribution to my Traditional IRA and then a few days later (same year) I convert 100% of the non-deductible Traditional contributions to my Roth IRA, leaving $0.00 in my Traditional IRA.  Does my Traditional IRA have a basis?

Q2 – Does a Roth IRA have a basis?  (I’ve read “Roth IRA contributions and Roth conversions are all basis since those funds have already been taxed.")

Q3 – Since I am 59 ½, do I need to keep tracking basis for either a Traditional or Roth IRA?

I’ve read that Roth Basis only comes into play for tax purposes should I withdraw money prior to age 59 ½.  Once a Roth IRA is held for 5 years and the owner is over 59 ½ yrs old, Roth IRA basis no longer matters and all contributions and earnings are tax free.  Is this a true statement?

Thank you for your help!

[name removed]

[baldietax]

Q1 - if you are doing 'back door' Roth conversions via your Traditional IRA and 'immediately' doing the conversion for the same amount as your contribution, leaving always $0 balance in your Trad IRA, then you do not have any basis.  Your return should include Form 8606 which does the calculation for the tax on the Roth conversion and tracks any basis in the IRA.  From what you describe, what your 8606 should show is $0 basis to start, your non-deductible conversion is adding to the basis, $0 market value in all your IRAs as of year-end, the calculation for the Roth conversion should show that $0 is taxable and the entire contribution/conversion is nontaxable which reduces your final basis back to $0.  It's the fact that you don't have any balance or basis in the IRA that allows the Roth conversion to be fully non-taxable.

Two things to be aware of over time:

1. If you do a 401k rollover to an IRA so your IRA balance is no longer zero, then this process starts to get less advantageous as your backdoor Roth conversion will then not be fully tax free (e.g. 7k non-deductible contribution/conversion via an IRA with 93k starting balance but no other basis, so 100k total immediately prior to Roth conversion with 7k basis; results in only 7/100=7% of your Roth conversion being tax free ($490), 93% of it being taxable ($6510) leaving 93k in the IRA with a $6510 basis.

2. Your Trad IRA contribution is limited by earned income, so if at some point you retire and no longer have any earned income you will not be able to do these contributions/backdoor conversions any more.  Some folks realize this when they come to file and then have to unwind the whole thing from prior year which is a mess.

Q2 - Roth IRA doesn't have basis, but if you withdraw money from it before the earnings are tax-free you have to keep track of how much of your Roth balance was from contributions (which you are always free to withdraw) vs. how much was earnings (which will incur a penalty if withdrawn too early).  By default if you make a withdrawal it's assumed you are withdrawing contributions before earnings.  See https://www.schwab.com/ira/roth-ira/withdrawal-rules

Q3 - Any basis on your Traditional IRA must continue to be tracked (on Form 8606) as your withdrawals are always taxable, the only thing that changes after 59.5 is you don't get a penalty.  For Roth see Q2, and I think for Roth older than 5 years and over 59.5 it's all tax free so the contribution vs. earnings distinction becomes moot.

Not a CPA/Expert so just my 2 cents, hope this helps.  Fidelity and Schwab usually have good advice pages on these topics.