Does being able to deduct an IRA contribution matter for IRA cost basis?

[rhaining23]

I've used TurboTax (desktop) fro decades.  We usually contribute the max to our traditional IRAs, and I follow TurboTax's walkthrough for how to enter it.  While doing 2022 taxes this year, TT showed a screen saying the cost basis of this account is $X and I can confirm or correct it.  $X seems vastly too low.  I've kept track of every dollar we've put into our IRAs.

Going back through the PDF versions of all my prior tax returns, I see that TT sometimes fills in "IRA deduction" and sometimes does not, probably because of income limitations.

My question is:  does having an IRA deduction matter in any way for calculating the cost basis of a traditional IRA?

I assume IRA deductibility has nothing to do with IRA cost basis, and that TurboTax (or I) did something wrong in past years so the cost basis has not carried over correctly.  TT allowed me to type in the total amounts I know we've contributed to the traditional IRA accounts, and collected a simple text field explaining the difference.  (I just wrote in, "TurboTax did not correctly transfer cost basis for IRAs".)

Is this reasonable?

[RalphH1 · Accepted solution]

Your “cost basis” in a Traditional IRA is the total amount of the contributions which were not deductible in the years they were made. (The “best answer” in this other Community thread is a good explanation of this.) They’re the part for which there was no earlier tax benefit, so they come out tax-free later.

Your basis is tracked on Form 8606 (seen here), and you should be seeing this in your TurboTax returns. In Part I, additional non-deductible contributions are added as they occur, and the part of any distribution in the current year allocable to basis is calculated as non-taxable. So if you’ve changed your basis to the total amount of your contributions, you’ll definitely want to change that back. And if you did so in a prior year, it gets more complicated but not a huge deal as long as you haven’t taken distributions since doing that.

@rhaining23, hopefully it’s a quick fix on this year’s return. But don’t hesitate to re-post here if it turns out to be a bigger project and you have more questions!