Traditional IRA basis after Roth conversion

[Bigratollie]

My wife has a traditional IRA that she uses only for back door Roth conversions each year she’s over the income limit for regular contributions. Can someone explain how the traditional IRA basis changes each year after the conversions or when I am asked for basis in TurboTax do I add up her nondeductible contributions to that traditional IRA for each year, pretty sure I have entered that wrong a few times and it has messed up some of our form 8606 thank you 

[Opus 17]

If the IRA is really only used for backdoor, then there shouldn't be any confusion.

However, be aware that all traditional IRA accounts are combined as one account for tax purposes, even if they are different accounts at different brokers.  If she has a traditional IRA and broker A that has $10,000 of deductible contributions (zero basis) and she has an account at broker B that she uses for backdoor Roth IRAs which has $7000 and a $7000 basis, then for tax purposes, you must fill out form 8606 as if she had one combined IRA with $17,000 of balance and $7000 basis.

Please clarify whether your wife has any deductible balance in any IRA.

Assuming that she has no deductible IRA contributions in any IRA account anywhere, then this is what her form 8606 should look like each year (using the 2023 form as an example, the numbers will be slightly different for prior years)

Line 1 (current year non-deductible contributions) $7000

Line 2 (total basis in traditional IRA -- note this is your total prior basis from the end of the previous year) $0.

(If you are correctly doing backdoor Roth IRA contributions with no deductible balance in any IRA, your prior year end basis will always be zero.)

Line 6 (value of traditional IRAs at the end of the current year) $0.

Line 8 (total amount converted to Roth IRA) $7000.

Line 10 (non-taxable fraction) 1.000.

Line 11 (non-taxable portion of conversion) $7000.

Line 14 (traditional IRA basis as of the end of the current year--this will carry forward to the next form 8606) $0. 

If she has deductible contributions in any IRA, all bets are off the table, we would have to start looking at some real numbers.

[Bigratollie]

Thank you for the fast reply. No she has no other traditional IRA accounts just that one and they are all nondeductible contributions. There has been a year maybe two years where she forgot to convert it all but then we converted it the following year just trying to get a grip on what to put down in that basis box on the 8606 each year thank you.

[Bigratollie]

So just to clarify in 2021 she converted 6500 but accidentally left 2500 in there so that following year the basis should’ve been 2500 on the 2022 form 8606, thanks again

[Opus 17]

---

@Bigratollie wrote:

So just to clarify in 2021 she converted 6500 but accidentally left 2500 in there so that following year the basis should’ve been 2500 on the 2022 form 8606, thanks again

---

Ok, I still don't understand your specific question.

If she started 2023 with a non-deductible basis of 2500, added more funds, and then converted everything, then the 2023 form 8606 should have 

Line 1 $6500 (assuming max contribution)

Line 2 $2500

Line 6 $0

Line 8 (amount converted) will be some amount larger than $9000 $8000, which is the $9000 basis plus any investment growth on the $2500 leftover in the account (or it could be less than $9000 if your investments lost money)

Line 12 $8000 $9000

Line 14 (new basis) $0

Line 15c (taxable amount) = the gain that was included in line 8 due to the investment growth of the original leftover $2500 + the gain on the $2500.

[Bigratollie]

You have clarified a lot thank you, my confusion was with the definition of basis But if I understand correctly now when you convert out of that traditional IRA, that wipes out your basis and you start over in the traditional that is

[Opus 17]

---

@Bigratollie wrote:

You have clarified a lot thank you, my confusion was with the definition of basis But if I understand correctly now when you convert out of that traditional IRA, that wipes out your basis and you start over in the traditional that is

---

The "right way" to do a backdoor Roth contribution is to start with zero pre-tax amounts in any traditional IRA, or, that you convert all your pre-tax IRA contributions and gains and pay tax on the conversion, so that in future years you start with zero pre-tax amounts in any IRA.  If you have pre-tax funds in any IRA, you can only do a partial conversion, leaving you with a partial basis, and it gets complicated to keep track of.  To keep it clean, you have to convert all the pre-tax funds and pay tax, then it's super clean and easy after that.

[fanfare]

Just convert 100 %.

you put $6,000 non-deductible into an IRA.

You delay the conversion and interest makes your balance $6,025.

After converting $6, 025, $25 is taxable.

your basis is again zero.

@Bigratollie 

[afromca]

is the sequence of conversions important? I am in somewhat of a similar situation, although my spouse had some amount from a deductible IRA in 2012-14. We just converted it in late 2024 (moved money from traditional IRA to roth IRA), then started backdoor after that conversion towards EOY 2024.  So once the first step is done, does the situation become cleaner? (meaning we owe tax only on the first conversion?). Thanks!

[Opus 17]

---

@afromca wrote:

is the sequence of conversions important? I am in somewhat of a similar situation, although my spouse had some amount from a deductible IRA in 2012-14. We just converted it in late 2024 (moved money from traditional IRA to roth IRA), then started backdoor after that conversion towards EOY 2024.  So once the first step is done, does the situation become cleaner? (meaning we owe tax only on the first conversion?). Thanks!

---

I'm not entirely clear because your facts may be different than the person you are adding on to. 

Everything that happens in 2024 gets reconciled on a 2024 return, everything that happens in 2025 on the 2025 return, and so on.  For a real backdoor Roth IRA to work, you need to end the year with zero balance in any traditional IRA accounts.    But, remember that conversions happen when they happen, they are not back-dated like contributions sometimes can be.   If we suppose you had traditional IRA funds and you did a full Roth IRA conversion in 2024, you would end up 2024 with zero basis and zero balance, and then you could do the backdoor in 2025, and you would pay tax on the pre-tax conversion amount on your 2024 return.  But if you did all that in 2025, the result would be the same.  You can contribute non-deductible funds for 2025, convert everything in 2025, you will pay tax on the deductible portion (same as you would in the other example) and you end 2025 with zero balance allowing you to go forward for 2026.

The only timing issue is that you want to do the traditional to Roth conversion pretty soon after the contribution, so you don't have to convert and pay tax on investment gains that happen between the contribution and the conversion. 

[afromca]

Thanks, apologies for not being clear. My situation is entirely about 2024 only. Converted traditional IRA to Roth IRA as step 1 (so balance was 0 then), then as step 2 executed the backdoor Roth with non-deductible contribution to the traditional IRA. The traditional IRA has 0 balance now. I was wondering if I will be taxed only on step 1 deductible contribution (which was there since 2012-14 timeframe and has grown), or will pro rata apply to me because of step 2. Thanks for your guidance.

[Opus 17]

---

@afromca wrote:

Thanks, apologies for not being clear. My situation is entirely about 2024 only. Converted traditional IRA to Roth IRA as step 1 (so balance was 0 then), then as step 2 executed the backdoor Roth with non-deductible contribution to the traditional IRA. The traditional IRA has 0 balance now. I was wondering if I will be taxed only on step 1 deductible contribution (which was there since 2012-14 timeframe and has grown), or will pro rata apply to me because of step 2. Thanks for your guidance.

---

A "backdoor Roth" has two steps, first you make a non-deductible contribution to a traditional IRA, then you convert it (roll it over) to a Roth IRA.  Are you saying you only performed the first step?  Then yes, you must follow the pro-rata rule. The conversion will only be partly taxable (instead of fully taxable) and the remaining balance in your traditional IRA will be partly deductible and partly non-deductible.  This will all be reported on form 8606.  You will want to convert the remaining funds in 2025, after entering any non-deductible contribution for 2025, so you end 2025 with a zero balance in traditional IRAs. 

[afromca]

I think I am not explaining properly.

1) had a deductible contribution from 2012-2014 period in a traditional IRA.

2) converted that to Roth IRA in 2024. This is not a backdoor. 

3) did a separate backdoor in 2024 after the above (non deductible to traditional IRA, and then immediately converted it to the Roth).

4) is there pro rata applicable above, as balance in the traditional IRA is 0 on 12/31

Thanks!

[Opus 17]

Then you are fine.  But check form 8606 to be sure.

Technically, the pro-rate rule is still applied, because everything you did in 2024 is reported on one tax return.  Suppose you have $10,000 of deductible contributions and gains, and $7000 of non-deductible contributions.  Your form 8606 should show zero basis at the beginning of the year, $7000 of non-deductible contributions, $17,000 of conversion, of which 59% is taxable ($10,000), and zero basis at the end of the year.  But the result is what you want it to be.