Help with understanding backdoor Roth IRA conversions and calculating the basis.

[Lily725]

Hello, I am just looking for confirmation that I am understanding the full tax implications of a Backdoor Roth IRA conversion and then correctly calculating the basis.

For simplicity, I am just going to use a hypothetical $1,000 as my annual contribution (yes, I am aware of contribution limits).  The following would be a breakdown of calendar-year contributions, conversions, and recharacterizations from the past few years.

2020: $1,000 contributed directly to Roth IRA

2021: $1,000 contributed directly to Roth IRA

2022:  Traditional IRA opened for Backdoor Roth conversion.  $1,000 contributed to Traditional IRA and converted to Roth IRA.  Also, $500 of the 2021 contribution was recharacterized.

2023: $1,000 to Trad IRA and converted to Roth

2024: $1,000 to Trad IRA and converted to Roth.  

In summary, since the accounts were opened, I would have contributed a total of $5,000, broken down as follows: $1,500 directly to the Roth, $500 being recharacterized, and $3,000 converted from Trad to Roth.  

To my understanding (and please let me know if I am misspeaking), all Roth IRA contributions are post-tax, resulting in tax-free growth.  The backdoor Roth conversion gets around the income limits by making non-tax-deductible contributions to a Trad IRA, and then taking advantage of no income limits on conversions to a Roth.  

My last question is how to both calculate, and report, the basis for my Roth IRA.  Because all of the contributions, either directly to the Roth, or via conversion or recharacterization, are post-tax, my basis would equal my total contributions?  So $5,000?  And how do I report this when doing my tax return via TurboTax (Deluxe desktop version)... is it just the basis for the 2024 tax year contributions ($1,000), or the cumulative total of all contributions to this Roth IRA ($5,000)?  Lastly, can someone please explain to me in Lamens terms what a basis is for?

Thanks in advance for any help with bettering my understanding of this tax strategy! 

[DanaB27]

The Roth basis is the total amount you contributed to the Roth IRA that is still in the Roth IRA. You will have $2,000 direct contribution basis and $3,500 conversions basis. 

If you are under 59 1/2 the withdrawal of contributions and conversions are nontaxable. Money withdrawn from a Roth IRA comes from contributions and conversions in a distinct order: Distributions first come from contributions and then from separate yearly conversions in "first-in, first-out" order. See Pub 590-B for more details. Note, if you withdraw conversions before the 5 year period you will have to pay the 10% early withdrawal penalty (Pub 590-B).

You can enter the Roth basis either in the IRA contribution interview or after you entered a Form 1099-R for a Roth IRA distribution.

In the IRA contribution section:

1.  Click on "Search" on the top right and type “IRA contributions” 
2. Click on “Jump to IRA contributions"
3. On the "Roth IRA Contributions" screen answer "No"
4. On the "Did You Open a Roth IRA Before 2024?" answer "Yes"
5. On the "Let Us Track Your Roth IRA Basis" screen answer "Yes"
6. Continue through the questions and make sure you enter the net contributions prior to 2024 on the "Enter Prior Year Roth IRA Contributions" screen ($2,000)
7. On the "Any Roth IRA Conversions?" screen answer "Yes" if you made conversions before 2024
8. TurboTax will walk you through the conversion questions.

After entering a Form 1099-R for a Roth IRA distribution:

1. Click on "Search" on the top and type “1099-R” 
2. Click on “Jump to 1099-R” and enter all your 1099-Rs
3. Click "Continue" on the "Review your 1099-R info" screen after you entered all you Form 1099-R
4. Answer "Owned Any Roth IRA for Five Years?" screen
5. Continue through the questions and make sure you enter the net contributions prior to 2024 on the "Enter Prior Year Roth IRA Contributions" screen ($2,000)
6. On the "Any Roth IRA Conversions?" screen answer "Yes" if you made conversions before 2024
7. TurboTax will walk you through the conversion questions.