IRA basis

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Topic Author
IndigoE
Posts: 34
Joined: Sun Jul 11, 2010 5:44 pm

IRA basis

Post by IndigoE »

I think I screwed up! Thinking Trad. IRA's were just taxed as income when withdrawn... and that Roth IRA's grew "sheltered", I have not kept track of the basis of either. I just converted a small portion of Trad to Roth because my income is low this year. Will this amount just be treated as ordinary income? All of my Trad was within deductible limits.
jebmke
Posts: 25474
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: IRA basis

Post by jebmke »

If your traditional IRA is all pre-tax, the conversion will be treated as taxable income. Deductible IRAs do not have any basis.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Topic Author
IndigoE
Posts: 34
Joined: Sun Jul 11, 2010 5:44 pm

Re: IRA basis

Post by IndigoE »

Thank you, thank you! I will sleep better tonight.
Alan S.
Posts: 12669
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: IRA basis

Post by Alan S. »

IndigoE wrote:I think I screwed up! Thinking Trad. IRA's were just taxed as income when withdrawn... and that Roth IRA's grew "sheltered", I have not kept track of the basis of either. I just converted a small portion of Trad to Roth because my income is low this year. Will this amount just be treated as ordinary income? All of my Trad was within deductible limits.
OK - you don't have any basis in your TIRA which would be tracked on Form 8606, but everyone with a Roth IRA should keep track of their Roth basis at least until the Roth is qualified and fully tax free. For a Roth IRA you have two major sources of basis:
1) The amount of regular Roth contributions you made less distributions taken from this amount
2) The amount of conversions you made less distributions you took from this amount

The second source should also be broken down by the year of the conversion and by the amount converted that year that was taxable and also the non taxable amount should you distribute from this pool within 5 years of the conversion. This can be done by spreadsheet or simple manual tally sheet by year.

Having this breakdown in hand allows you to know at a glance the tax impacts of non qualified distributions you take. It also provides the amounts needed to complete Form 8606 in order to report these distributions. Maintaining this tracking should take around 10 minutes each year and save you hours of research to reconstruct these numbers if you don't. Once your Roth is qualified or 3 years have passed since your last non qualified distribution (if later), you can toss the tracking document.
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