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  • I made a $5500 contribution to my Roth IRA in 2015 (T1).
  • Later I recharacterized this contribution. The market had gone down and I only got $5090 in my TIRA when the recharacterization happened (T2).
  • Then after sometime I converted the amount in my TIRA back to a Roth IRA. This time the market had gone up and I got $5146 in my Roth IRA (T3).

Now I am trying to figure out how to file form 8606. This thread helped me a lot but it took a while to parse all of it and I think it would be useful to have this topic as a concise Q&A on this site. So given the facts above, are the forms below filled out correctly? What is purpose of line 14 (the basis) in form 8606?

Form 8606: enter image description here
enter image description here

Form 1040: enter image description here

Also these are the 1099-R forms I got from my custodian (vanguard). Are these correct?

1099-R when I did recharacterization: enter image description here
1099-R when I did conversion:
enter image description here

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It seems correct.

The "basis" of a Traditional IRA is the "after-tax part" of the Traditional IRA, i.e. the part that won't be taxed on withdrawal. The basis doesn't change as the value of the Traditional IRA changes. So, for example, if the Traditional IRA grew, then the "earnings" are not part of the basis (i.e. the earnings are before-tax and need to be taxed on withdrawal) even if they grew from after-tax money.

In this case, however, your Traditional IRA shrank since contribution, and since you started with 100% of the value being basis, your "basis" actually became more than the total value of your Traditional IRA! That's why it looks so weird. When you converted the entire value of your Traditional IRA to Roth IRA, you only used up part of the basis, so that now you have $354 of basis with 0 value in the Traditional IRA! You can use this basis in the future when you withdraw or convert any Traditional IRAs in the future, to have part of it be considered after-tax.

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