Residual TIRA Basis

[archbish99]

This is my first year doing a backdoor Roth IRA. I contributed to the TIRA, then did a full conversion the following day. The value had gone down slightly, meaning there is no taxable portion to the conversion.

But what happens to the minor residual basis? Does it mean that I have a small amount of basis I can subtract from any gains on a future conversion? Or does it vanish into the "Miscellaneous Deductions" that I won't actually be able to take?

The amount is laughably trivial, but I'm curious what the mechanics are here.

[livesoft]

Everybody else with a few cents leftover simply does another conversion right away. You should, too.

[ryman554]

Everybody else with a few cents leftover simply does another conversion right away. You should, too.

That wasn't the question. The OP presumably lost $5 between contribution and conversion.

OP, if you convert the whole amount, the extra basis disappears. If you leave $1 left, you retain the whole basis.

In my opinion, it's really not worth it to try to keep it around. Sure, it will let you convert some extra growth tax free, but we're probably talking about a $1 or so, contrasted with very slightly more complex 8606 going forward.

[livesoft]

Ooops!

[archbish99]

Does it disappear immediately, or would I be able to apply it to a conversion later this year, at least? I agree trying to assiduously carry it year-to-year seems like overkill.

[retiredjg]

This is my first year doing a backdoor Roth IRA. I contributed to the TIRA, then did a full conversion the following day. The value had gone down slightly, meaning there is no taxable portion to the conversion.

But what happens to the minor residual basis? Does it mean that I have a small amount of basis I can subtract from any gains on a future conversion? Or does it vanish into the "Miscellaneous Deductions" that I won't actually be able to take?

The amount is laughably trivial, but I'm curious what the mechanics are here.

There are two different schools of thought on this. Smart people on both sides. I don't know which is right, but school 2 makes most sense to me.

School 1 - the basis disappears. You lose it. You can't have basis in something that has a zero balance.

School 2 - the basis remains on line 14 of your Form 8606. Next time you do a conversion, that basis will offset income that would otherwise be taxable.

If you work through the Form 8606 by hand, the basis will remain there on line 14. I believe we have heard that some of the tax software makes the basis disappear. I do not know if all tax software makes the basis disappear.

[Alan S.]

Does it disappear immediately, or would I be able to apply it to a conversion later this year, at least? I agree trying to assiduously carry it year-to-year seems like overkill.

Any basis is applied in equal %s to all distributions made in a single year. A conversion is a distribution.

As to whether remaining basis is erased or not, it depends on whether your last Form 8606 including Part I includes basis on line 14. Generally, if you either make a ND contribution that year or take a partial distribution or conversion, you must complete Part I. Unused basis goes on line 14, and if your last 8606 includes a line 14 amount, it is brought forward to line 2 of the next 8606 you file.

So, what would erase unused basis? Filing Form 8606 without Part I and this would occur if you made no current year ND contribution and converted your entire balance to a Roth IRA. In that case, you complete Part II only, not Part I and there will be no line 14 completed. Unused basis is erased.

That said, if you do have a very small basis, so small that filing Form 8606 is more of an irritant than a tax savings, you could simply ignore your basis and not file the Form, paying tax on the entire distribution. The IRS is not about to send you an inquiry about that or correct the error and send you a $2 refund either. Most likely, the IRS has no effective way of knowing your basis other than looking at your last 8606 form.

[archbish99]

Thanks!