Backdoor Roth and basis question

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BeaverFood
Posts: 21
Joined: Fri Jul 26, 2013 1:29 pm

Backdoor Roth and basis question

Post by BeaverFood » Tue Dec 20, 2016 11:37 pm

We had existing tIRAs with Vanguard which we recently rolled into employer plans. I just want to confirm: now that those IRA balances are $0, we no longer have a basis and can contribute the $5500 each into those tIRAs and then do the Roth conversion. My Vanguard cost basis page shows nothing for unrealized gains and losses but shows the realized gains and losses from the recent transfer of those funds into the employer plan. I just want to be 100% sure I am good to proceed with the backdoor Roth yet in 2016.

Thank you!

jane1
Posts: 734
Joined: Mon Dec 26, 2011 2:00 am

Re: Backdoor Roth and basis question

Post by jane1 » Wed Dec 21, 2016 12:02 am

You are good to go.

Unrealized and realized cost basis in an investment is different from basis in IRA. Although concept is the same i.e. how much of your holding have you already paid tax on.
Your IRA basis is made up on all your non-deductible contributions still within IRA.

Worth understanding this since it will come in handy when you do your taxes -
Your IRA basis has likely been zero even though your IRA balance may have been $100K. Once you make a $5500 non-deductible contribution (i.e. tax has already been paid on it), that $5500 becomes the basis. So if that becomes $6000, you would ultimately have to pay tax on the $6000-$5500 (basis) when you withdraw (distribute or convert). Your basis gets reset to 0 once IRA becomes empty. If you add another $5500 next year to your IRA without any conversion/distribution, your basis becomes $5500 + $5500 = $11000.

weedf16
Posts: 65
Joined: Tue Apr 14, 2015 12:16 pm

Re: Backdoor Roth and basis question

Post by weedf16 » Wed Dec 21, 2016 1:49 am

jane1 wrote:You are good to go.
Concur. You are all set.


Cheers :sharebeer

retiredjg
Posts: 32692
Joined: Thu Jan 10, 2008 12:56 pm

Re: Backdoor Roth and basis question

Post by retiredjg » Wed Dec 21, 2016 6:54 am

You never had any basis. For an IRA, "basis" means "already taxed money".

Agree you are good to go. My standard warning is to go through the paperwork before you try the back door. If you cannot work through form 8606 in pencil, don't do the back door. Don't depend on a tax professional to help - many will have no idea what you are talking about.

JW-Retired
Posts: 6755
Joined: Sun Dec 16, 2007 12:25 pm

Re: Backdoor Roth and basis question

Post by JW-Retired » Wed Dec 21, 2016 8:49 am

BeaverFood wrote: I just want to be 100% sure I am good to proceed with the backdoor Roth yet in 2016.
Your post only talked about your Vanguard accounts. You are not good to go if you have any other SEP, SIMPLE, tIRA, or rollover IRA accounts somewhere else.

That should be obvious but sometimes it isn't.
JW
Retired at Last

BeaverFood
Posts: 21
Joined: Fri Jul 26, 2013 1:29 pm

Re: Backdoor Roth and basis question

Post by BeaverFood » Wed Dec 21, 2016 4:09 pm

JW-Retired wrote:
BeaverFood wrote: I just want to be 100% sure I am good to proceed with the backdoor Roth yet in 2016.
Your post only talked about your Vanguard accounts. You are not good to go if you have any other SEP, SIMPLE, tIRA, or rollover IRA accounts somewhere else.

That should be obvious but sometimes it isn't.
JW
Thanks for the reminder, but we only have/had the traditional IRAs, employer plans and a taxable account, so I believe we're ready to go.

Appreciate everyone's help!

Alan S.
Posts: 7560
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Backdoor Roth and basis question

Post by Alan S. » Wed Dec 21, 2016 5:55 pm

It IS very possible to have TIRA basis, yet have a 0 balance for your TIRAs.

The Form 8606 Inst include a "Total Basis Chart" that indicates your TIRA basis is the amount shown on line 14 of the last 8606 filed.

The back door procedure can illustrate this. Assume you make a 5500 ND contribution and have no other TIRA assets. But you invest it in a stock or stock based fund. Market tanks and before you convert, the 5500 contribution is now worth only 5000. You convert the 5000, and the line 14 will show that there is still 500 of basis remaining.

No matter when you make your next TIRA contribution, you will enter that leftover 500 on line 2 of your next 8606.

NOTE: To have a line 14, you must complete Part I. Part I must always be completed for a year in which you make a ND contribution. However, If you did NOT make a contribution AND converted your entire TIRA, you skip Part I and enter the conversion directly in Part II. No part 1 means no line 14 and any remaining basis is erased.

jane1
Posts: 734
Joined: Mon Dec 26, 2011 2:00 am

Re: Backdoor Roth and basis question

Post by jane1 » Wed Dec 21, 2016 8:12 pm

Alan S. wrote:It IS very possible to have TIRA basis, yet have a 0 balance for your TIRAs.

The Form 8606 Inst include a "Total Basis Chart" that indicates your TIRA basis is the amount shown on line 14 of the last 8606 filed.

The back door procedure can illustrate this. Assume you make a 5500 ND contribution and have no other TIRA assets. But you invest it in a stock or stock based fund. Market tanks and before you convert, the 5500 contribution is now worth only 5000. You convert the 5000, and the line 14 will show that there is still 500 of basis remaining.

No matter when you make your next TIRA contribution, you will enter that leftover 500 on line 2 of your next 8606.

NOTE: To have a line 14, you must complete Part I. Part I must always be completed for a year in which you make a ND contribution. However, If you did NOT make a contribution AND converted your entire TIRA, you skip Part I and enter the conversion directly in Part II. No part 1 means no line 14 and any remaining basis is erased.
Yes. True, Alan. I missed that use case in explaining the IRA basis concept to OP. Thanks for pointing it out.

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