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IRA Basis: Guide to Tracking It for Traditional and Roth IRAs

By Dan Miller · June 09, 2023 · 5 minute read

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IRA Basis: Guide to Tracking It for Traditional and Roth IRAs

Investing money in an individual retirement account (IRA) can be an important part of saving for retirement. Among the types of IRAs you may have are Traditional IRAs and Roth IRAs. With a Traditional IRA, you can often deduct your contributions in the year you make them and pay tax on your withdrawals. A Roth IRA works in the opposite way — contributions are generally not tax-deductible and your earnings and withdrawals can be tax-free.

Because of the way that withdrawals from IRAs can be tax-free, it’s important to be aware of your IRA basis. When you withdraw money from a Traditional or Roth IRA, you may only need to pay tax on withdrawals that exceed your basis.

What Is a Roth IRA Basis?

The total amount that you’ve contributed to your Roth IRA over the years is considered your Roth IRA basis. Because Roth IRA contributions are not deductible in the year that you contribute them, you can withdraw your contributions at any time without tax or penalty.

Is a Roth IRA Basis Different From a Traditional IRA Basis?

Calculating your Traditional IRA basis is a bit different than calculating your Roth IRA basis. Understanding these differences in large part comes down to understanding what an IRA is and how various types of IRAs work.

When calculating your Roth IRA basis, you add up all of the contributions you make. This is because no Roth IRA contributions are tax-deductible.

With a Traditional IRA, on the other hand, some contributions are deductible in the year that you make them. So your Traditional IRA basis only includes contributions that were not tax-deductible in the year that you made them.

What Are the Rules of a Roth IRA Basis?

Contributing to a Roth IRA can be a great way to invest and save for retirement, because your earnings and withdrawals are tax-free, as long as you make qualified distributions. Your Roth IRA basis is easy to calculate, since it’s the net total of any contributions that you make, minus any distributions.

What Are the Rules of a Traditional IRA Basis?

If you open a Traditional IRA, you’ll want to make sure that you’re familiar with the rules of a Traditional IRA basis. Your basis in a Traditional IRA is the total of all of any non-deductible contributions you made, as well as any non-taxable amounts included in rollovers, minus all of your non-taxable distributions.

How Is IRA Basis Calculated?

When you start saving for retirement, you’ll want to make sure that you are accurately calculating your IRA basis. The exact formula for calculating your IRA basis varies slightly based on whether you have a Traditional or Roth IRA.

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Roth IRA Basis Formula

Contributions to a Roth IRA are never tax-deductible. That means that you will use the sum of all of your contributions to calculate your Roth IRA basis.

Traditional IRA Basis Formula

Calculating your Traditional IRA basis works in a slightly different fashion. Because many contributions to Traditional IRAs are tax-deductible in the year you make them, you don’t include all of your contributions when calculating your basis. Instead, you will only use the contributions that are NOT tax-deductible when calculating your Traditional IRA basis. If all of your Traditional IRA contributions are tax-deductible, then your basis will be $0.

Why Is Knowing Your IRA Basis Important?

Not knowing your IRA basis is a retirement mistake you can easily avoid. You want to know what your IRA basis is, because it represents the amount of money that you can withdraw from your IRA without tax or penalty.

Generally, any withdrawals up to your tax basis are tax and penalty-free, while withdrawals above your tax basis may be subject to income tax and/or a 10% penalty. While it is usually not a good idea to withdraw money from your retirement accounts, knowing your basis can help you make an informed decision.

💡 Recommended: How to Open an IRA

Starting an IRA With SoFi

Understanding your IRA basis is an important part of investing and planning for your retirement. At its simplest, you can calculate your IRA basis by adding up all of your non-tax-deductible contributions and subtracting any previous distributions. For your Roth IRA basis, you can use all of your contributions, while for Traditional IRAs you can only use the value of any contributions that you did not deduct from your taxes. Your IRA basis is the amount that you can typically withdraw from your account without having to pay income tax and/or a penalty.

Opening an IRA online with SoFi can be a great way to start saving for retirement. Starting a Traditional IRA may allow you to lower your taxable income this year, while contributing to a Roth IRA your retirement by allowing your retirement contributions to grow tax-free. It can be a smart financial decision to use one of these accounts to make sure you have enough money put aside for your retirement.

Help grow your nest egg with a SoFi IRA.

FAQ

Do I have an IRA basis?

Everyone with an IRA has an IRA basis, although it’s possible that your IRA basis is $0. Your IRA basis is the net total of your non-tax-deductible contributions minus any distributions. For a Roth IRA, you use the value of all your contributions, while with a Traditional IRA, it’s only the contributions that were not tax-deductible.

How do I find my IRA basis?

Your IRA basis is the sum of any non-tax-deductible contributions that you make to an IRA minus any distributions that you take from your account. Your IRA basis is not generally reported anywhere. So if you don’t know your basis, you will need to calculate it based on your historical contributions and distribution amounts.

Who keeps track of your IRA basis?

The IRS does not generally keep track of your IRA basis — you are responsible for making sure your IRA basis is accurately calculated. If you use an accountant, they may calculate and track your IRA basis. You’ll want to make sure that you are accurately tracking your basis so that you can correctly pay any taxes you owe on IRA distributions.


Photo credit: iStock/Eva-Katalin

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