What exactly is cost basis for a traditional IRA?

[DanaB27]

You will have a total basis of $7,000 listed on line 3 of Form 8606. The $5,000 2021 contribution will be entered as a traditional IRA contribution and when TurboTax asks you will enter the prior-year basis of $2,000 (from the 2020 recharacterization). Please review the steps below:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “traditional IRA”
6. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
7. Enter the “$5,000” you contributed
8. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
9. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” since you had nondeductible contributions in 2020 from the recharacterization.
10. You will enter “$2,000” as the basis in the Traditional IRA from prior years.
11. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter “$5,000”.

Then you will enter your 1099-R for the $7,000 conversion:

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?"
12. You will see a screen that shows your prior-year basis of $2,000 click “continue”
13. On the next screen “Tell us the value of your traditional IRA” you will enter the value of all the traditional IRA, SEP, and SIMPLE IRAs that your wife has.

After entering all this TurboTax will calculate your remaining basis and this basis will show up on line 14 of Form 8606. You will enter this basis next year on your 2022 tax return when TurboTax asks about your prior-year basis before 2022.

@dhuynh44

[dhuynh44]

@DanaB27 

Thank you!  I have another burning question please and I think I’m finally getting there.   Everything is making a lot of sense with these examples.  For tax return 2020, we accidentally entered our 1099–R amount (let’s say $3200) as our after tax contributions instead of the actual amount contributed from her bank.  Then we also had the recharacterization of $2000 we have been talking about.  So when we amend 2020:

$3000 was contributed directly to traditional and converted to Roth instantly in 2020

$2000 was recharacterized in 2021 for year 2020

So when we amend 2020, do I change the $3200 to $3000, or change it to $5000 to include the recharacterization?

Then I understand I am putting the $2000 as end of year basis for year 2020. Is this correct?

Thank you!

[DanaB27]

Yes, when you amend your 2020 tax return you will change the traditional contribution amount to $3,000 and will enter the $2,000 recharacterization when you enter the Roth IRA contribution. Yes, your basis at the end of 2020 will be $2,000, shown on line 14 of Form 8606. Please see the steps below:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Select “traditional IRA”
5. Select “Roth IRA”
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Enter the traditional contribution amount of $3,000
8. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
9. Continue until you get to the Roth IRA questions
10. Answer “No” to “Is This a Repayment of a Retirement Distribution
11. Enter the Roth contribution amount of $2,000
12. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount of $2,000 (no earnings or losses)
13. TurboTax will ask for an explanation statement where it should be stated that the original $2,000 plus $xxx.xx earnings (or loss) were recharacterized.
14. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (if you are thinking about doing a backdoor Roth. If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a screen saying $0 is deductible)

@dhuynh44

[dhuynh44]

@DanaB27 

ok.  And then for basis at end of 2020 will be $2000 correct?  Thank you

[DanaB27]

Yes, the basis at end of 2020 will be $2,000. 

[dhuynh44]

@DanaB27 

Hi, I just wanted to follow up with a question.  After absorbing all the information and taking a little break, we were curious about the recharacterization input.  In 2020 my wife contributed $2500 accidentally to Roth, this amount grew to $3100 over the course of the year.  In 2021, it looks like we recharacterized this $3100 according to the 2021 5498.  

Of the $3100, $2500 was cash deposit and the remaining $600 was gains in the market.   When we amend 2020, do we put our $2500 cash contribution as the recharacterized amount, or the $3100?

Also, the end of year basis for 2020 would be $2500 correct?  

Thank you!

[AmyC]

Yes and yes. You recharacterized $3100 according to your 5498. Your basis remains $2500.

[dhuynh44]

@AmyC @DanaB27 

Hi, I was going thru all the answers from my questions, and ran into possibly conflicting information from each of you.  If possible are you guys able to clarify this?

“Yes and yes. You recharacterized $3100 according to your 5498. Your basis remains $2500.”

In TurboTax it asks how much we contributed to Roth which was $2500.  But there is a question that asks “how much of this did you recharacterize?”

This amount grew to be $3100.  The total amount recharacterized was $3100 ($600 gains).

 @DanaB27  States the answer to the question “how much of this did you recharacterize” should be $2500

@AmyC  if I read your answer correctly you state the answer should be $3100

Am I simply reading @AmyC  your answer incorrectly or is your answer different?   Thank you 

[DanaB27]

You recharacterized $2,500 but transferred $3,100. I have to admit that the title “Tell Us How Much You Transferred” is confusing because TurboTax asks how much you recharacterized.

In this example, the person contributed $6,000 to a Roth and wants the report the recharacterization. Please note how it states on the screen “How much of the $6,000…”. Therefore, you only enter the contribution amount (in your case $2,500) as recharacterized not any gains or losses.

I believe AmyC was referring to that the whole $3,100 will be transferred and the gains will be treated as earned in the traditional IRA. Please note how she mentions that your basis will be $2,500.

@dhuynh44