Understanding IRA basis calculation when doing yearly backdoor Roth conversions

Thanks for the explanation! So just to make sure I understand correctly, the basis gets reported each year on the 8606, but since I'm converting everything right away, my basis effectively becomes $0 at the end of each tax year? Also, do I need to be keeping any special records for this, or is the yearly filing of Form 8606 sufficient documentation?

That's exactly right! When you convert the full contribution amount each year, your remaining traditional IRA basis will be $0 at the end of that tax year. The basis essentially transfers to your Roth IRA through the conversion process. Keeping copies of your completed Form 8606 for each year is the most important documentation you should maintain. These forms create a paper trail of your non-deductible contributions and conversions. Also save your IRA contribution statements and conversion confirmations from your financial institution as supporting documentation. TurboTax should have your history too, but it's always good to maintain your own independent records.

This sounds interesting but I'm skeptical about giving my tax docs to some random website. How secure is it? Does it keep copies of your tax returns after analysis?

Can it handle more complex situations? I've got some old 401k rollovers mixed in with my traditional IRA funds plus some backdoor Roth conversions and trying to figure out the pro-rata rule is making my head spin.

The security is actually really good - they use bank-level encryption and don't store your documents after analysis. You can also delete anything you upload immediately after getting your results. I was hesitant at first too, but after researching their security protocols, I felt comfortable using it. Yes, it absolutely handles complex situations! That's actually where it really shines. It can analyze multiple retirement accounts, including 401k rollovers, and walks you through how the pro-rata rule affects your specific situation. It even created a personalized strategy for me to minimize tax impacts from the pro-rata rule going forward.

Wait, this actually works? I thought it was impossible to get through to the IRS. How does this service actually get you to the front of the line? Seems too good to be true.

Yeah right. There's no way this actually works. The IRS phone system is deliberately designed to be impossible to navigate. I'll believe it when I see it - probably just another scam trying to get desperate taxpayers' money.

It absolutely works! They use a technology that navigates the IRS phone system and holds your place in line. When an agent is about to be available, they call you back so you can connect. It's not getting you to "cut" the line - you're still in the queue, but you don't have to personally sit on hold. I was definitely skeptical too, but I was desperate after spending hours trying to get through myself. It's not a scam - they don't ask for any personal tax information, just your phone number to call you back when an agent is available. The service literally just gets you connected to the actual IRS, then you're talking directly with an IRS representative, not with them.

That's a really good point that I hadn't considered. Luckily, I don't have any other traditional IRA accounts - I've only been doing these backdoor Roth contributions the last few years. Does the pro-rata rule apply to 401k accounts too, or only to IRA accounts? I have an old 401k from a previous employer that I haven't rolled over.

The pro-rata rule only applies to IRA accounts (Traditional, SEP, and SIMPLE), not to 401(k)s. So your old 401(k) won't affect your backdoor Roth strategy as long as you leave it where it is. This is actually why some people with existing traditional IRA balances will do a "reverse rollover" - moving their pre-tax IRA funds into their current employer's 401(k) if the plan allows it. This removes those funds from the pro-rata calculation, making the backdoor Roth process clean again. Something to keep in mind if your situation changes in the future.

TurboTax can handle backdoor Roth transactions, but you need to make sure you enter everything in the right order and answer the questions correctly. First enter your non-deductible traditional IRA contribution, then separately enter the Roth conversion. Make sure you indicate the traditional IRA contribution was non-deductible. When it asks about the conversion, be sure to enter any earnings that might have accrued between contribution and conversion (even if it was just a few dollars or cents). TurboTax should then generate Form 8606 correctly.

Thanks! That's helpful. I contributed and converted on the same day, so I think there weren't any earnings. But I'll check my statements just to be sure. Do you happen to know which section in TurboTax I need to go to? I've been poking around but can't seem to find where to enter the non-deductible contribution specifically.