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I've been using TurboTax to file my taxes for the past decade or so. Since 2015, for income reasons, I have been making after tax (nondeductible) contributions to a Traditional IRA, and then converting that money to a Roth IRA.

However, I've misunderstood what basis meant, especially since TurboTax says most people have a basis of 0. So I've been filing a basis of 0 all these years.

It is my understanding that my basis is the amount of post-tax money that I actually contributed, even if that original contribution was to a traditional IRA. (link ref to this question).

Question 1: Is it correct that if I were to file 2018 properly, my basis should be: $22,000 (I maxed $5,500 contributions 2015 - 2018).

Question 2: Do I need to go back and correct previous filings? Or can I just submit the up-to-date basis in my filing for 2018.

--------- EDIT -------------

It seems I didn't provide enough information here and I seem to be confusing folks. Let me reiterate my current situation.

On January 1st, 2015, I made a $5,500 (after-tax, directly from my checking account) contribution to my Traditional IRA (which previously had $0, across all my Traditional IRAs; I understand you can have multiple tIRAs, but they all group per individual). I do not invest the $5,500 that I contribute to the tIRA. On Jan 5th, after the funds settle in the account, I convert those funds to my Roth IRA.

I repeat this procedure on Jan 1, 2016; Jan 1, 2017; Jan 1, 2018;

As I file my returns in each of those years, on Form 8606, I failed to increment my Roth IRA basis by $5,500 each year to account for the after-tax contributions to that account.

Do I need to go and correct previous years, or should I just file the correct basis in my return for 2018?

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    There are too many things incorrect in your assumptions and actions. If you have any money in your Traditional IRA (remember that your Traditional IRA is one account even if you have invested it with different custodians) from 2014 and earlier years when you were making pre-tax contributions, then your conversions of post-tax contributions from 2015 onwards into Roth IRAs were most likely incorrectly reported and you most likely owe tax for previous years. This is because the rollover is mostly pre-tax money and only a little bit of the post-tax money you just put in, and you .... – Dilip Sarwate Jan 9 at 3:41
  • (continued) ..... most likely told the IRS that it was all post-tax money that you had just contributed to that specific Traditional IRA account. No matter that the IRA account you take the rollover money from contains only the post-tax contribution that you just made to your Traditional IRA, as far as the IRS is concerned, the rollover was proportionately pre-tax money and post-tax money based on what you have in the sum total of all your Traditional IRA accounts, and you owe income tax on the pre-tax amount. You probably need to go back and correct previous filings. – Dilip Sarwate Jan 9 at 3:49
  • Are you asking about the "basis" in Traditional IRA (this means the amount of after-tax contributions to Traditional IRA that have not been withdrawn or converted out)? Or about the "basis" in Roth IRA (this means the amount of contributions and conversions to Roth IRA that have not been withdrawn)? – user102008 Jan 9 at 6:45
  • I think I need to be more specific. I'll write a bit here, but elaborate further in my original question. I file Form 8606 with every return. In that form, it asks about the basis. My guess is the basis for my traditional IRA and my Roth IRA should be nearly identical. I'll continue adding information n the question. – David Jan 9 at 22:59
  • @DilipSarwate & user102008: I added additional information in the original post. Please let me know if you're still confused. – David Jan 9 at 23:06
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Form 8606 requires you to compute, each year that it changes, your basis of 'nondeductible' (really, nondeducted) contributions, if any, in your traditional IRA. The change can be an addition (due to a nondeducted contribution), a subtraction (due to a distribution or conversion 'using up' some or all of the basis), or both. The 'backdoor' procedure you followed resulted in both an addition and subtraction each year leaving the result at zero.

Form 8606 does not require you to report basis (of contributions and conversions) in your Roth IRA. You should keep a record of this (preferably with your tax records, so you can find it when needed) because you may need it in the future to determine -- and if audited to prove -- whether distributions you take are taxable or not. But you don't report Roth basis on 8606 or anywhere else; you only characterize and report the distributions when taken, which you haven't yet.

I thought my answer in the Q you linked summarized the definition pretty well:

Thus your basis at any time in a Roth IRA is the total contributions/conversions i.e. post-tax money put in, less any portion you've already 'used up' in previous years

Conversions are post-tax in the Roth, whether or not they were post-tax in the traditional, because if they were pre-tax in the traditional they are taxed at the time of conversion. The 'backdoor' ideally avoids having any pre-tax money in the conversion, and thus any tax at the time of conversion.


ADDED: as far as distributions, the simpler case is the design case that you take 'qualified' distributions: after the Roth account is open at least 5 years and you are 59.5, disabled, dead, or certain 'exception' cases like first-time homebuyer or excess medical. In that case, you don't use 8606 part III at all; you simply report the distribution as nontaxable on your 1040 (formerly line 15a but not 15b; now 4a but not 4b).

The IRS receives information about your contributions and conversions each year on form 5498, and distributions on form 1099R, from the custodian/trustee, and you receive copies. In addition you showed conversions on your return in 8606 part II, and in this (backdoor) case the nondeducted traditional contributions in part I. The custodian/trustee can distinguish most factors for 'qualified' and puts them in the code in 1099R box 7; see the instructions for that (available on the IRS website). This means in many cases where you claim a distribution is qualified, IRS can verify it from information they already have; in other cases if they suspect you are cheating, they can ask for additional information on the specific exception you claim, which is simple (at least on the IRS scale).

In the more complicated case where you withdraw early (and without an exception), you need records of your contributions and conversions and to what extent previous distributions used up basis. This is done on 8606 part III whose instructions are here -- the version on the website is still 2017 as of now, but I don't expect this area to change significantly for 2018 except in the line references to 1040. The instructions (and form) are also available in PDF, if you prefer that (as I do); look under the 'publications' section of the website.

You start with your nonqualified distributions on lines 19-21. 19 includes first-time homebuyer and disaster distributions but the former are subtracted on 20-21 and the latter handled later. (Don't be misled by the item excluding 'return of contributions'; that means a distribution to remove excess contributions in the same year or early enough the following year. It doesn't mean the normal case where you put in contributions, invest them, and later take distributions that are treated as coming first from the contributions.)

On 22-25 you effectively subtract your basis. This is done in two chunks apparently because of the interaction with form 5329, but if you read both parts of the instructions together, they add up to:

  • if you have not previously taken any (Roth) distribution, just add up all your contributions and conversions. It doesn't tell you how to do contributions, but presumably saving copies of (all) your prior years 5498(s), or the information on them, is good. For conversions it says to use all your prior years 8606 part II, unless you have no conversions at all in which case the conversion basis is zero (but that's not your case).

  • if you have previously taken a distribution, it tells you to use the worksheet and table which appear about a screenful below the instructions for line 25b. These effectively tell you to start with the then-remaining basis computed on your most recent 8606 part III, and add to it contributions (similarly unspecified) and conversions (similarly from past-year 8606 part II) in all years since (if any).

You subtract your basis from the nonqualified distributions, make a further exclusion for disaster distributions, and if there's anything left that goes on your 1040 as taxable income. And as hinted, it may also go on 5329 for the additional 10% 'penalty' tax; you need to follow separate instructions for that.

In short, stick with the simpler case if you can :-)

  • I see. That makes sense. Marking this the correct answer; I didn't know that you don't have to report a basis for the Roth. Based on your answer, I agree that my basis for my Traditional should be $0 since I contribute and convert all. Out of curiosity, should I decide to take a distribution out of my Roth that is less than the total amount of money I converted, how does the IRS know not to tax me on that if that basis is not explicitly tracked? What sorts of records should I keep track of to prove my Roth "basis" ? – David Jan 10 at 2:41
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    @David: far too much for comments, see edit – dave_thompson_085 Jan 11 at 9:57
  • yikes, that was a lot more complicated than I had imagined. appreciate all the details, thanks for the edit! – David Jan 11 at 23:11

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