How to record IRA Cost Basis.

[OrdAandM1979]

Hi,

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 non-deductible contributions to a Traditional IRA and then 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 for income tax reporting purposes?

Q2 – Should I track Roth Basis?  If so where do I add Roth Basis in Turbo Tax?

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

Q3 – I was told, Roth Basis only comes into play for tax purposes should I withdraw money prior to age 59 1/2.  Once a Roth IRA is held for 5 years and the owner is over 59 1/2 yrs old, Roth IRA basis no longer matters and all contributions and earnings are tax free.  Is this a true statement?

Q4 – With respect to Q3, when does the “held for 5 years” timeline start?  The first day I opened the Roth (i.e 1997) or five years from the date of the Conversion?

Thanks for your help!

[DanaB27 · Accepted solution]

Q1. No, you won't have a basis left in your traditional IRA if you make the contribution for the same year you convert the fund. For example, make a contribution for 2021 and convert it right away in 2021. 

Q2. Yes, it is always good to track your basis. You will need to track direct contributions and conversions separately. You can track your basis during the IRA contribution interview.

1.  Click on "Search" on the top right and type “IRA contributions” 
2. Click on “Jump to IRA contributions"
3. Select “traditional IRA” and "Roth IRA"
4. Answer questions in regards to your traditional IRA
5. On the "Roth IRA Contributions" screen answer "No"
6. On the "Did You Open a Roth IRA Before 2021?" answer "Yes"
7. On the "Let Us Track Your Roth IRA Basis" screen answer "Yes"
8. TurboTax will ask you follow-up questions in regards to net contributions and conversions.

Q3. Yes, that is true. Once you are 59 1/2 and had the IRA for 5 years then your distributions are Qualified Distributions and the basis doesn't matter since the whole distribution is tax-free. Please be aware, that TurboTax might still ask for the net contributions and conversions during the interview.

Q4. The 5 years start when you made your first contribution to the Roth.