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]

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@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

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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]

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@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

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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