Roth Conversion Cost Basis Question

[Austin704]

This year I did my first Roth conversion. I rolled $52k from a tIRA to a Roth at Schwab. I am paying estimated income tax on the $52k quarterly (painful). I understand that the 5-year clock starts effective January 2020 for this conversion and that at the end of 5 years both the converted amount and any gains are available tax-free (and penalty-free if over 59.5 years of age).

When I look at the cost basis for the Roth it is $47k, which leads me to believe that the cost basis reflects what I paid for the shares when I added them to the tIRA in the years prior to 2020. But since I’m paying income tax on the full $52k conversion, shouldn’t my cost basis step up to that amount?

Seems to me there’s a potential for the IRS to consider funds in this Roth account above $47k to be earnings and therefore subject to additional tax if accessed prior to the end of the 5-year holding period, even though I will have paid income taxes on the entire amount!

What am I missing? Why doesn’t the cost basis of the Roth equal the amount of the conversion since taxes on the full amount are paid in the year of the conversion?

 

[kaneohe]

Cost basis kept by brokers for IRAs to me are a mysterious relic of taxable brokerage accounts and mean nothing for IRAs unless you are keeping track
of how well a particular investment is doing relative to when you bought it.

For the Roth, the conversion basis is what the TIRA converted amount was worth when you converted it.

btw........when you turn 59.5, the 5 yr clock changes from a conversion clock to age of 1st Roth clock so if you opened your first Roth before this conversion, the funds might be available earlier.

 

[Animorph]

What keneohe said.

 

[f35phixer]

to high jack thread a little, i need to start converting also. so my example would be bought SGRAX (changed symbol recently) Mar. 2012 1095 shares@40.71= 44,612, Jan. 2020 i have 4776@34.17 =163,199. can you smart people explain how this would be done?

thanks.

 

[kaneohe]

......................................can you smart people explain how this would be done?

what does "this" mean here and does it relate to basis ?

 

[gauss]

The 2nd page of IRS Form 8606 may help you to understand how and when taxes and or penalties may be applied to Roth IRA distributions. Definitions of Roth contribution basis and Roth conversions basis are also part of this.

Additionally your IRA custodian will report to you and the IRS on form 5498, issued in the May timeframe the year following the year of contribution or conversion, the annual Roth contributions and conversions.

-gauss

 

[VanWinkle]

Cost basis kept by brokers for IRAs to me are a mysterious relic of taxable brokerage accounts and mean nothing for IRAs unless you are keeping track
of how well a particular investment is doing relative to when you bought it.

For the Roth, the conversion basis is what the TIRA converted amount was worth when you converted it.

btw........when you turn 59.5, the 5 yr clock changes from a conversion clock to age of 1st Roth clock so if you opened your first Roth before this conversion, the funds might be available earlier.

+1 Exactly!!

 

[Austin704]

Many thanks to all of you for lifting the fog on this question and pointing me to Form 8606...