Keeping track of basis in a traditional IRA

[ThisIsSoTaxing]

A tax attorney told me during a free 30 minute consultation that, when I deposit the proceeds of an investment fraud lawsuit back into the traditional IRA as partially recovered losses from a bankrupt bond investment, I should ask the IRA administrator to adjust the basis of the investment accordingly.  From what I have been able to determine since this conversation, losses (or gains) in a traditional IRA have no tax consequences.  It's my understanding that when I start drawing from my IRA that it is just seen as income and that I can't take a deduction for any losses suffered from a fund that I am drawing from.  If that is the case, is there any reason to keep track of the basis of traditional IRA investments?

[Mike9241]

Really a tax attorney told you that.  There are two types of Traditional IRA's They don't actually have to be kept in separate accounts because multiple accounts are treated as one for most tax purposes. If you took a deduction for all your IRA contributions your tax basis is zero and nothing will change that. If you made non-deducted contributions, those are your tax basis and again nothing happening within the account will change that basis except withdrawals.  The basis is tracked on form 8606 and is required to ne included in your retunr for years you make withdrawals.

[dmertz]

Unless the tax attorney mistakenly thought that this investment was in a nonqualified account (not in an retirement account), I agree with what Mike9241 seems to be implying, this tax attorney needs to get an education on IRAs.  Investments in an IRA have no capital basis for the IRA custodian to track because investments in an IRA are not subject to capital-gains treatment.

Regarding basis in nondeductible traditional IRA contributions, a restorative payment to your IRA does not change your basis in nondeductible traditional IRA contributions.  Basis in nondeductible traditional IRA contributions is required to be tracked by the participant.  IRA custodians have no way to know whether traditional IRA contributions are deductible or nondeductible on your tax return.