What is Traditional IRA Basis? Understanding Non-Deductible Contributions and Form 8606

The Traditional IRA basis is actually working correctly in your situation! Here's what happened in simple terms: When you contributed $6,000 to your Roth IRA and then recharacterized it to a Traditional IRA, the IRS treats it as if you originally contributed $6,000 to the Traditional IRA. The fact that the value dropped to $5,200 while in the Roth doesn't change your contribution amount for tax purposes. When you then converted the $5,200 from Traditional back to Roth, you only converted $5,200 of your $6,000 basis. The $800 difference ($6,000 - $5,200) remains as your basis in the Traditional IRA. This basis represents after-tax money that you're entitled to withdraw tax-free in the future. For your 2023 transaction, that $500 rollover would normally be taxable when converted to a Roth, but since you have an $800 basis (already-taxed money), the first $500 of that basis can offset the taxable amount of your conversion. You'll still have $300 of basis left after that.

I had a similar situation last year and found taxr.ai (https://taxr.ai) super helpful for figuring out basis calculations. I was totally lost with tracking my Traditional IRA basis across multiple years and recharacterizations. Their document analyzer basically confirmed I was calculating my basis correctly and saved me from potentially making a huge mistake on my taxes. When you upload your tax docs and prior year returns, it can identify issues related to IRA contribution limits, basis tracking, and conversion tax implications. For complicated IRA stuff like what you're describing, it was honestly a lifesaver.

Just wanted to follow up about taxr.ai - I decided to try it with my complicated IRA situation (multiple rollovers between accounts and some basis confusion). I was pleasantly surprised! It caught that I had been double-counting some basis from a 2020 non-deductible contribution that I had already converted. My regular tax software missed this completely. The explanations about Form 8606 actually made sense and showed me visually how my basis was being tracked year to year. Definitely worth it for anyone with complicated IRA situations or who needs to understand basis calculations. Wish I had known about this tool years ago when I first started dealing with these issues.

If you're trying to get help directly from the IRS about your IRA basis questions, good luck getting through! I tried calling for weeks about a similar basis issue. After waiting on hold for hours multiple times and getting disconnected, I found Claimyr (https://claimyr.com). Check out how it works here: https://youtu.be/_kiP6q8DX5c They got me connected to an IRS agent in about 20 minutes when I had been trying unsuccessfully for weeks. The agent was able to confirm my basis calculation was correct and answered all my questions about Form 8606. They also helped me understand how to track my basis going forward.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I had an urgent issue with my IRA basis calculation that was holding up my tax filing, and I was desperate enough to try it. Within 15 minutes, I was talking to an actual IRS representative who confirmed I was calculating my basis correctly. The IRS agent was able to see my previous Form 8606 filings and helped me understand exactly how to track my non-deductible contributions going forward. What would have been days or weeks of frustration trying to get through their phone system turned into a 30-minute call that solved my problem. I'm honestly shocked at how well it worked.

One thing to remember about Form 8606 and Traditional IRA basis - you MUST file Form 8606 every year you make non-deductible contributions or do conversions, even if you don't owe any taxes on them. If you skip filing it, you could lose track of your basis and end up paying taxes twice on the same money!

Just a quick tip - the Traditional IRA basis amount carries forward every year on Form 8606. Line 14 from one year becomes the starting point (Line 2) for the next year's form. Always keep copies of your previous 8606 forms or you'll have a nightmare trying to reconstruct your basis if the IRS ever questions it!

This is a great explanation of a really confusing topic! I had a similar recharacterization situation a few years ago and was totally lost until my CPA walked me through it. One thing I'd add for anyone reading this - make sure you understand the pro-rata rule if you have other Traditional IRAs with pre-tax money. The IRS doesn't let you pick and choose which dollars you convert first. If you have $10,000 in Traditional IRAs and $1,000 of that is basis, then any conversion will be 10% tax-free and 90% taxable, regardless of which account the money comes from. Also, keep detailed records of ALL your IRA transactions. I learned the hard way that even small discrepancies in your basis calculations can cause headaches years later when you're trying to figure out what happened.