IRA Basis?

Submitted by Jeremy Lucas on Sun, 2018-04-01 18:00

Year 1: 5500 contributed to an Traditional IRA and then converted to Roth.
Year 2: no existing Traditional IRA balance, 5500 contributed to an Traditional IRA and then converted to Roth.

Q1) In filling out year 2 tax form8606, is there any total bias (line 2)? My understanding is zero, correct?

Q2) There is no tracking of an Roth IRA basis needed because it’s all post tax and grow tax free, correct?

Thanks!



Submitted by Alan - IRA critic on Sun, 2018-04-01 19:14

  1. For both years you either deducted the contribution or should have filed Form 8606 to report a non deductible contribution. Form 8606 also reports your conversion and figures the taxable amount. You probably made non deductible contributions here and converted them. For Year 1 your 8606 would not show anything on line 14 if you converted in the same year as your contribution. That year 1 line 14 carries over to line 2 of the Year 2 8606. Line 2 of the Year 2 8606 would then be 0 as you expected.
  2. Incorrect. For a TIRA your basis is your non deductible contributions less the amount applies in distributions. You applied the 5500 ND contribution to your conversion, reducing your basis to 0 -until you made the next ND contribution. However, for a Roth IRA your basis consists of ALL contributions and conversions including taxable conversions. You need a method of keeping track of your Roth basis in the event you ever take a Roth distribution before your Roth is qualified (5 years and 59.5), as you will have to report your Roth basis on Form 8606 for Roth distributions. This basis determines when you start withdrawing earnings rather than just contributions. Roth basis is split into two categories – regular Roth contribution basis and conversion basis. Based on your post only, you now have a regular Roth contribution basis of 0 and a conversion basis of 11,000. Most people fail to keep track of their Roth basis, which is only harmless if they never take a distribution until their Roth is qualified. For an earlier distribution, if your basis is not tracked you will not know how much you can withdraw tax or penalty free and you will not be able to report the withdrawal correctly on Form 8606. So yes, there is definitely tracking required. It is not hard if you keep up with it annually and can be done via a spreadsheet or old fashioned paper tally sheet.

Submitted by Jeremy Lucas on Sun, 2018-04-01 23:24

Much appreciated.   Looks like year 2 was done incorrectly.  That was a couple years back, can a new 8606 be sent in by itself or does it require an amendment form as well?

Submitted by Alan - IRA critic on Mon, 2018-04-02 02:36

What was the error?

Submitted by Jeremy Lucas on Tue, 2018-04-03 00:14

A non zero basis was added for year 2.

Submitted by Alan - IRA critic on Tue, 2018-04-03 00:54

If the error affected the tax due for that year or any year after that, you would have to file a 1040X with the corrected 8606 for each affected year. Otherwise, if the taxable amount of any distributions was not affected, you can file the 8606 by itself and add a note indicating that the change does not affect the tax due for the applicable year. That said, there is always a chance that the IRS will ask for a 1040X anyway because they usually get the 8606 forms to add basis. Yours apparently reduces basis since basis was overstated on line 2 and the IRS rarely sees 8606 forms to reduce basis.

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