Published on: November 26, 2020 Last modified: June 15, 2021

How to Accurately Calculate Roth IRA Basis

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    If you’ve chosen a Roth IRA as a form of retirement savings, knowing your Roth IRA basis is crucial to tracking your financial health — especially if you may have chosen the tool without knowing much about it. The best way to make good decisions about your retirement funds is by understanding the investments you have, and a Roth IRA can be effective when used properly. 

    Learning how you can contribute to, when you can withdraw from, and how to calculate your Roth IRA basis will put you in much greater control of your investments. The tool is also a great way to save for retirement when you’re a small business owner who won’t be able to rely on a pension. Here’s everything you need to know about calculating your Roth IRA basis.

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    What is a Roth IRA Basis?

    Before digging into Roth IRA basis, you must first understand Roth IRAs. Individual retirement accounts (IRAs) follow a few simple rules set forth by the Internal Revenue Service (IRS):

    Being able to calculate your Roth IRA basis — the money you have put into your Roth IRA over the lifetime of the account — is important to help you keep track of taxes you might have to pay during your retirement . While you may have to pay on some of your income, the withdrawals from your Roth IRA are not one of them. 

    How you contribute to your Roth IRA is up to you. You can contribute up to $6,000 per year ($7,000 if you’re over 50), and may wish to make a one-time deposit each year or choose multiple deposits that add up to the limit. Additionally, a Roth IRA can be created up until the tax filing day of the following year to count in the previous tax year.

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    Understand Taxes on Retirement Income

    Once you stop working a 9 a.m. to 5 p.m. job, you will only have retirement income coming in. Knowing how you’re taxed on this makes a big difference, as you don’t want more taken out than necessary. Too many taxes means that you’ve got less coming in than you anticipated.

    Your retirement income may include:

    Depending on what you have, you may be taxed on some of these items because they’re seen as income. You want to be cautious of how much money you’re bringing in, and working with a tax professional can help ensure you have the forms of retirement income you want in place.
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    What is a Qualified Withdrawal from a Roth IRA?

    When withdrawing from a Roth IRA, you can do so without penalties as long as you’re doing so from your basis and not your investment income at any time, regardless of age. There are some rules about investment earnings, however:
    In some instances, you can avoid a penalty if you can show the money is being used for specific purposes, such as medical expenses, a first-time home purchase, or qualified education costs.
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    The Benefits of a Roth IRA

    It’s important to understand that there are two types of IRAs: traditional and Roth. Both are individual retirement accounts, but there are quite a few differences and benefits.

    There are a few main benefits to keep in mind:

    Of course, it’s always a good idea to speak with a tax professional to ensure you choose the IRA that’s right for you.
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    How to Calculate Roth IRA Basis

    Being able to calculate a Roth IRA basis is important to ensure you know how much you have contributed over the years. Understanding the basis also means it will be easier to know whether you need to explore other forms of retirement income.

    The calculation process is simple:

    1. Identify how long you have had your IRA.
    2. Determine how much you have contributed to your IRA on an annual basis.

    If you’ve had your IRA for 10 years and you contribute $1,500 to it each year, for example, your basis is $15,000. Anything above and beyond that is the investment income — and only that amount is going to be subject to fines if you don’t follow the necessary withdrawal rules.

    There are a few things you may run into when calculating your Roth IRA, such as if you’ve converted your traditional IRA into a Roth one. All nondeductible contributions become your basis. If you want to look at your total balance — which is the basis plus earnings — you can ask the holder of your IRA to supply a statement.

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    Additional Questions About Your Roth IRA Basis?

    A Roth IRA can be a great investment tool for your retirement. As you learn more about it, you can determine how much you want to contribute and how frequently to do so.

    Contact Silver Tax Group today to learn more about your Roth IRA Basis and ask any questions that may arise. We’re here to help you with all of your retirement income planning.

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