Anonymous
02/20/2014 17:26
Subject: explain basis to me (as in taxes and retirement accounts)
basis is how much you put into an investment. So in a taxable account, if you buy stock for $1000, that is your basis. If the stock goes up to $1500, you will only owe tax on your gain (the amount over your basis).
For retirement accounts, basis is the amount you paid tax on before it went into the account. So if you put $5500 into an IRA and deducted it all, your basis would be zero. If you deducted none of it, your basis would be $5500.
If you had a 401k from an old employer, chances are that was all deducted from your pay pre-tax and you had no basis in it. If you leave the employer and roll it into an IRA then you still have no basis in that IRA.
The tricky part is that the IRS considers all of your IRAs to be one big IRA for purposes of basis. So if you have a rollover IRA with $10000 and no basis, and a traditional IRA with $5000 and $5000 in basis, the IRS will think that you have an IRA of $15k and $5k in basis, so they will treat every dollar you convert from IRA to Roth IRA as having 33 cents of basis, regardless of which account it comes from.
For retirement accounts, basis is the amount you paid tax on before it went into the account. So if you put $5500 into an IRA and deducted it all, your basis would be zero. If you deducted none of it, your basis would be $5500.
If you had a 401k from an old employer, chances are that was all deducted from your pay pre-tax and you had no basis in it. If you leave the employer and roll it into an IRA then you still have no basis in that IRA.
The tricky part is that the IRS considers all of your IRAs to be one big IRA for purposes of basis. So if you have a rollover IRA with $10000 and no basis, and a traditional IRA with $5000 and $5000 in basis, the IRS will think that you have an IRA of $15k and $5k in basis, so they will treat every dollar you convert from IRA to Roth IRA as having 33 cents of basis, regardless of which account it comes from.
Anonymous
02/20/2014 16:41
Subject: explain basis to me (as in taxes and retirement accounts)
Your basis, for your back door Roth, should be the amount you contributed to the traditional Roth.
So if you contributed the max of $5500 last year, that is your basis. Goes on form 8606 - I don't use tax software so I can't help you there.
The idea is to account for how much of the money converted to the Roth is the $ you put in (basis) vs. how much is earnings due to the market going up.
You should only have to pay tax on the earnings but need to keep track of your contributions/ basis otherwise it assumes the entire account balance should be taxed.
So if you contributed the max of $5500 last year, that is your basis. Goes on form 8606 - I don't use tax software so I can't help you there.
The idea is to account for how much of the money converted to the Roth is the $ you put in (basis) vs. how much is earnings due to the market going up.
You should only have to pay tax on the earnings but need to keep track of your contributions/ basis otherwise it assumes the entire account balance should be taxed.
Anonymous
02/20/2014 14:12
Subject: explain basis to me (as in taxes and retirement accounts)
So I just finished my taxes and my TaxAct estimate of taxes owed was about $2500 less than when I did it on TurboTax. If I made a mistake, it was probably in trying to figure out the basis stuff after doing a backdoor roth IRA (so converting my traditional IRA to a Roth IRA). Can anyone explain what exactly basis is and explain it like you are speaking to a 5 year old? Was anyone else confused while filling out the retirement section on TaxAct?