How do i calculate my Roth basis?

[virginia_pirrone]

How do I calculate my Roth basis and will it change every year?

[DavidD66]

Your Roth basis is the contributions you have made to your Roth account, if you have not taken any distributions.  If you have taken distributions, they are considered return of basis first.  You basis will only change when you make contributions to, or take distributions from your Roth IRA.  Otherwise, your basis will not change.

[virginia_pirrone]

Thank you … so my specific situation is this… I am retired and have been taking distributions from my Roth account since 2021. I’m not sure if last year I provided the correct cost basis, but my question has to do with this year. Do I recalculate my cost basis now based on how much I have taken out since I have retired? Also, I don’t know by return of basis first. Other than this one issue, I have no other problems with my taxes this year.

[DanaB27]

If you had the Roth IRA for 5 years and are 59 1/2 or older then this will be Qualified Distributions and your Form 1099-R should have code Q in box 7. In this case you can ignore TurboTax questions about net contributions prior to 2023.

If your Form 1099-R shows code J in box 7 then you will have to keep track of your net contributions prior to 2023 and enter it in TurboTax.  Yes, your net contribution would be your contribution minus distributions taken before 2023. 

[aandonian1]

Does the basis calculation consider all the contributions made to all roth IRAs for the year? 

(given that contributions were made to two accounts that year)

[DanaB27]

Yes, the net contributions prior to 2024 include all Roth IRA accounts. If you made Roth IRA contributions for 2024 then you will enter it in the IRA contribution interview under Deductions & Credits and TurboTax will add it to your Roth IRA basis if you let TurboTax track your basis. 

@aandonian1 

[LMTaxBreaker]

I was not tracking my Roth IRA basis since I started my Roth IRA in 2011. I didn't see the point, other than the rare case where I'd need to withdraw funds early. 

I'm still young (46) and not planning on withdrawing Roth IRA funds any time soon (referring to the 5 years thing), but the way things are going in this country, perhaps I should consider the potential need, in which case I understand that withdrawing before 59-1/2 has implications. 

As I understand it, I can withdraw CONTRIBUTIONS tax-free before 59-1/2, but not earnings, thus the importance of tracking the basis. In that situation, I imagine the IRS governance looking something like this - asking for someone to please confirm: 

• Background: I've never elected to allow TurboTax to track my basis, or if I did, I think I was entering $0, which is incorrect, because I contributed in 3 ways in the past: 1) in the early days when I was allowed to, I made a few small direct contributions; 2) as my income went over the limit, I converted my non-deductible traditional IRA to Roth (and paid the taxes on the earnings upon conversion); 3) in more recent years, I've done a few backdoor Traditional to Roth conversions, where the initial Traditional contribution was made as non-deductible.
• Hypothetically let's say I have a $500k balance in Roth IRA and I want to withdraw what I can (the basis, or contributions), tax-free, at age 50. Let's say that amount is $250k.
• I'd get a 1099-R for the tax year that I withdrew, and I'd indicate "not taxable" on my return, since I'd only be withdrawing my contributions, and not the earnings.
• IRS Governance: I suppose that first of all, it's a non-issue until I get audited, but let's say I get audited and they ask me to prove that the $250k I want to withdraw represents only my basis - my contributions over the years, and not the earnigs, which I'd withdraw tax-free after age 59-1/2.
  • What qualifies in the IRS's eyes as proof in that scenario? I can't imagine that it makes a bit of difference if I use TurboTax alone to track my Roth basis. For all intents and purposes, that tracking is just a more convenient scratch pad or notebook. My institution (Vanguard) only has the last 7 years of tax forms available on the website, and I had a hard drive crash years ago that caused me to lose records for 2016 and earlier (but maybe Vanguard can somehow dig those up for a fee or something?). 

One last question. I had written myself a note (started keeping meticulous tax notes on OneNote years ago) that: "The contributed amount does not include funds converted from traditional IRA accounts. (This is saying do not include funds that went into Roth IRA as a result of backdoor conversion)". 

Is the above comment in quotes actually true? I don't believe it is. 

Thanks 

[Opus 17]

@LMTaxBreaker 

The best proof would be copies of form 5498 that is issued to you by the IRA every year (usually in May) which documents the prior year contributions.  The IRS also gets copies of this form, and you can check your online transcript, but that only goes back 7 or 10 years.  If you don't have form 5498 and they are too old to get from the IRS or the account custodian, the IRS may be willing to look at other contemporaneous written records -- that means a written record that is made close enough in time to the event that it is likely to be accurate (and not just a spreadsheet you prepared from memory the night before the audit).  If you had used Turbotax every year to track the contributions, there is no guarantee the IRS would accept it, since you can enter anything into the program that you want whether true or false (they could still ask for backup proof to match the program entries). 

https://www.irs.gov/individuals/get-transcript

The laws and court rulings basically state that all income is presumed taxable, and the taxpayer is not entitled to any deduction, reduction or adjustment that they can't prove.  I would start by getting as many of your old records together as you can. 

[Opus 17]

@LMTaxBreaker 

Also, you need to track contributions and conversions separately, and you need the dates of each conversion (regular conversions and backdoor conversions).  

Your withdrawals are always deemed to come from contributions first, conversions second, and earnings last.

Contributions can be withdrawn any time tax-free.  Conversions are subject to a 10% penalty for early withdrawal if you are under age 59-1/2 and the conversion was less than 5 years ago.  (Which is why you need to know the date and amount of each conversion.)