What exactly is cost basis for a traditional IRA?

[dhuynh44]

H, I am just a little confused about entering this number in cost basis at end of December 2020.  We usually contribute nondeductible to traditional then convert to Roth right away as to not have any money in the traditional by end of year.   When it asks us this question, and let’s say we contributed an even $6000, however at the end of year 2020 there was $0 in traditional, do we put $6000 here, what was on our 5498 for year 2020, what is on our 1099-R, or $0 since nothing remains in the traditional?  Thank you 

[DianeW777]

You have zero cost basis in your IRA.  As you indicated you put the money into the traditional IRA, then convert to the Roth within the tax year. Keep in mind that you must track your Roth IRA cost basis because this is not being done on the tax return.  You must continue to do this until you withdraw and/or retire.

[bigjrm01]

I was confused as well with the same situation. You receive a 1099-R from your financial institution showing Gross distribution and taxable amount being the same. Say you put 6K into a non-deductable Traditional IRA , and then Converted to Roth IRA (back door IRA) shortly thereafter. Your 1099-R shows 6K Gross Dist and Taxable amount 6K.  Even the balance in Traditional acct is 0 by end of year.  Turbo tax will ask you a few questions later if those funds were converted to Roth IRA. After answering "yes" it will correct taxes owed and it will become a non event for taxes owed.

[dhuynh44]

Thanks all, during the interview process when it asks how much did I contribute to Roth IRA, do I input what I actually transferred from my bank ($6000) or the amount on 1099-R that was converted?  These numbers are not the same.  Thanks 

[dhuynh44]

@DianeW777 

So going forward what is the cost basis for Roth IRA?  Basically what the amount is on my form 1099-R every year that I converted?   Or the actual amount I contributed to traditional?  Bc these numbers are different thanks

[DianeW777]

The amount you convert from the traditional IRA and any additional funds you might contribute to your Roth IRA in addition to any conversions.  This will be your ongoing and accumulated cost basis in the Roth IRA.

Unfortunately, I am unable to speak to the differences you see on Forms 5498, it could be fees or interest earned even if short periods.  Check with your financial agent to understand the difference.

[dhuynh44]

@DianeW777 

here’s a curveball.  My wife during 2021 rolled over her pretax deductible IRA from vanguard to fidelity let’s say $10,000.   However, to the advice of my financial planner we contributed let’s say nondeductible $5000 to traditional then converted this cash amount to Roth within the same year.  This whole $5000 is now in the Roth, however the original $10000 pretax still remains in her traditional.   How does this affect reporting for TurboTax 2021?   We shouldn’t be paying any tax on the remaining amount in traditional correct?   Thank you

[DianeW777]

If existing IRA's contain any pre-tax money or earnings then it will be partly taxable when you take money from it to fund a Roth IRA. This will be worked out in the tax return using Form 8606.

• How do I enter a Backdoor Roth conversion in TurboTax?

Here is more information provided by our awesome Tax Champ @macuser_22 explaining the Backdoor Roth and rules:

'The "Backdoor Roth" does not exist in tax law. It is a procedure used by some to take advantage of a quirk in tax law that allows making a non-deductible contribution to a Traditional IRA when one cannot contribute to a Roth IRA, and the immediately converting the Traditional IRA to a Roth IRA, thereby getting the money into the Roth via "backdoor" tax free.

That "procedure" can only work of all these requirements are met:
1) No Traditional IRA account whatsoever can exist (that includes any SEP or SIMPLE IRA accounts) at the start. If existing IRA's contain any before-tax money or earnings then it will be partly taxable.
2) The Tradition IRA contributions must be reported on a 8606 form as non-deductible.
3) The conversion to a ROTH must be shortly after the contribution to avoid taxable gains.
4) The entire Traditional IRA value must be zero that the end of the year of conversion.'

[dhuynh44]

So this is interesting and thank you for the information.  Basically, we have about $14,000 rolled over deductible pretax from a  previous employer into traditional IRA.  We have been putting in $5000 for year 2021 into the SAME traditional IRA and converted this SAME after-tax dollars into a Roth.  Based on the information you provided, we actually are NOT allowed to do this backdoor roth bc we have an existing amount of $14,000 pre-tax dollars?  Will we then be taxed on the $5000 we converted? 

We were told we could do this by our financial institution.  If this is true that we could not do this, Going forward how can my wife do a backdoor conversion if she has existing money in her traditional IRA?

Thank you!

[JulieS]

Yes, if you have other traditional IRA amounts in addition to the amounts that are being converted using the back door Roth strategy, your Roth conversion will not be entirely tax free. 

The IRS pools all of your IRA accounts into one figure and uses a pro-rata rule to determine how much can be converted tax free. 

For example, if you have $20000 in a traditional IRA, with $5000 being non-deductible, and you are converting $5000 this year using the back door Roth strategy, 25% will be tax free.

$5000 / $20000 (total IRA amount) = .25 or 25%.

Your financial institution did not lie to you unless they guaranteed it would be 100% tax free regardless of other IRA accounts you may have. 

As far as the future, the backdoor Roth loophole may be closed soon. Legislation has passed the House, but not the Senate to do that. 

[dhuynh44]

@JulieS 

@DianeW777 

Thank you for the info.  My wife rolled over $14k pretax to traditional from her work, and contributed $5k nondeductible to the traditional IRA.  she converted this $5k to Roth, but left the remaking $14k pretax in the traditional.  How do we report this in turbotax so she only gets taxed on a portion of the $5k converted and not on the $14k still sitting in her traditional?  Thank you!

[DanaB27]

Please be aware, that each distribution/ conversion will have a taxable part because of the pre-taxed $14,000 in the traditional IRA. The only way to perform the backdoor Roth conversions without being taxable in the future is to empty the traditional IRA by converting it all and pay the taxes on this conversion. Otherwise each contribution/conversion will be part taxable and part nontaxable. 

TurboTax calculates the taxable part based on the information entered about the basis and the value of all traditional, SEP and SIMPLE IRAs on December 31, 2021 (step 7 below).

1. Click on "Search" on the top right and type “1099-R”
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
5. On the "Your 1099-R Entries" screen click "continue"
6. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
7. Answer the questions about the basis and value

@dhuynh44

[dhuynh44]

@DanaB27 

Thank you.  

So step 7 I would put $5k for our non deductible contribution, and where would we input the remaining $14k, when it asks for the basis for December, 2021?  I’m just confused bc you mentioned prior years. In 2020 we had a basis of $0, for 2021 we had a basis of $14k.  We also only put her contribution of $14k not her total after gains correct?

thank you 

[DanaB27]

If you did not have a basis from prior years you will enter $0 for the basis (nondeductible contributions/ after-tax contributions) in step 7 and you will enter the value of all your wife's traditional, SEP, and SIMPLE IRAs on December 31, 2021, on the next screen. You can find the value of the IRA on the end of the year statement. Then TurboTax can calculate how much is taxable and nontaxable.

The nondeductible contribution for 2021 will be entered when you enter the IRA contribution under Deduction & Credits.

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “traditional IRA”
4. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
5. Enter the amount you contributed
6. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
7. Continue through the questions.
8. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (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).

To verify, the $14,000 are pre-taxed rollover from the 401k rollover and therefore you do not have a $14,000 basis.

You contributed the $6,000 in 2021 and converted this in 2021. You did not make a contribution for 2020 in 2021, correct? 

[dhuynh44]

@DanaB27 

Ok.  I’m a little confused.  So you mentioned to put the VALUE of the traditional IRA in basis for December 31, 2021?  So, if she rolled over $14k but now the value of it after gains is $14,500, to enter $14,500 for the end of the year basis? 

“For example, if you have $20000 in a traditional IRA, with $5000 being non-deductible, and you are converting $5000 this year using the back door Roth strategy, 25% will be tax free.

$5000 / $20000 (total IRA amount) = .25 or 25%.”

In this example, we already paid taxes on the $5k, are they taxing 75% of the $5k we converted?  That wouldn’t make sense to tax the remaining $15k correct?

and we did not contribute anything from 2021 to 2020 from her bank account, she recharacterized maybe $2k or so in 2021 for year 2020. Thank you