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Cost Basis for legacy ROTH IRAs

By Terry Savage on March 25, 2020 | Wild Card

Am I required to track my cost basis for my two ROTH IRA accounts? The first account involved contributions from 2000 to 2014. The second related account is used at another financial institution to received my ROTH Conversions each year starting in 2016. Tracking a cost basis on a Tax free account is not logical to me. Does my brokerage firm report my cost basis to the IRS each year? If so I would think that they would send me a copy each year. I read that: If the shares were given to you as inheritance, the cost basis of the shares for them as the inheritor is the current market price of the shares on the date of the original owner’s death. I read that it is important for them to know my cost basis to prevent them from having to pay taxes on what should be a tax free distribution over a period of 10 years. If the cost basis is established on the day that I die, why should I track my cost basis? I have been trying to report the numerical sum of my contributions in Turbo Tax on the IRA work sheet when I file my taxes, is this sufficient?

Terry Says

Wait, you have several types of accounts.
1. Contributions directly to a ROTH IRA are not deducted at the time, and are withdrawn tax-free after they have been in the account for 5 years. No taxes are due. No cost basis necessary.
2. If you converted a traditional IRA to a Roth IRA, you paid taxes at the time of conversion, at your ordinary income tax rate. Future withdrawals will thus all be tax-free. (I would keep records of that tax payment at conversion.)
3. Contributions to a TRADITIONAL IRA are deducted at the time the contribution is made. But ALL withdrawals come out taxed as ordinary income in the future — so no cost basis is necessary.
4. Inherited IRAs now have new rules for distribution, depending on whether you are a spouse or an individual beneficiary. You need to keep the amount of the balance at date of death, and depending on your status as beneficiary now need to withdraw ALL the balance by the end of 10 years, instead of maybe being allowed to “stretch” it over your lifetime. But the cost of the assets inside the IRA are irrelevant to these distribution rules. That will all be taxed as ordinary income.

5. Any assets that were held OUTSIDE an IRA that you inherited get a new cost basis: the market value as of the date of death. That’s called a “step-up in basis” — and it could save the beneficiary from paying taxes if the asset had appreciated from its original cost.

In general, I keep a record of my account balances in each account — Roth and Traditional — IRAs at year-end each year. But the cost basis is not important for tax purposes in any of those accounts.

Those are the general rules. Check with your accountant or estate planning attorney for the specifics of your situation.



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