Tracking Roth IRA Basis After a Conversion

When you contribute or convert money into a Roth IRA, the IRS treats each dollar as “basis”—a record of how much of your account you can withdraw tax-free. Tracking basis is simple in theory but grows complex when you mix contributions, conversions, and earnings, because the IRS imposes strict ordering rules on which money comes out first.

Why Basis Matters at All

The Roth IRA’s main attraction is tax-free growth. But the IRS does not let you withdraw all of it anytime, tax-free and penalty-free. The account holds three layers:

1. Contributions: money you put in yourself, sourced from after-tax income
2. Conversions: money you moved from a traditional or SEP IRA, paying tax on the amount converted
3. Earnings: investment gains and interest accrued inside the account

The Roth allows you to withdraw contributions and (under certain conditions) conversions without tax or penalty. But earnings come out last, and early withdrawal of earnings before age 59½ triggers a 10% penalty plus income tax, unless an exception applies.

Basis is simply the cumulative dollar amount of your contributions and conversions. Tracking it accurately tells you exactly how much of your account is “safe” to withdraw without consequences.

Direct Contributions: The Simple Layer

Every dollar you contribute directly to a Roth IRA is basis and can be withdrawn at any time, for any reason, tax-free and penalty-free. This is the most generous feature of the Roth. Whether you contribute $5,000 at age 25 or $8,000 at age 50, that money is always available.

Keep a running total of all contributions you have ever made to the account. The IRS Form 5498 (filed annually by your custodian) reports contributions for the tax year, but you must reconcile it with your own records over time. A simple spreadsheet works: Year | Contribution Amount | Running Total.

Conversions: The Complication

A conversion occurs when you move pre-tax money from a traditional IRA, SEP IRA, or SIMPLE IRA into a Roth. You owe income tax on the converted amount in the year of conversion, but the amount itself becomes basis in the Roth—meaning you can withdraw it without tax later. However, the IRS adds a big catch: a “five-year holding period.”

The five-year rule applies separately to each conversion year. If you convert $10,000 from a traditional IRA in 2023, you must wait until January 1, 2028 to withdraw that $10,000 penalty-free. If you do a second conversion of $10,000 in 2024, the clock restarts, and you can withdraw the 2024 conversion starting January 1, 2029.

Withdraw a conversion before its five-year window closes, and you owe a 10% penalty on that early withdrawal—even though you already paid tax on it when you converted. This is a harsh rule, and it applies only to the conversion itself, not your contributions or earnings.

Tracking converted amounts by year is mandatory. Create a separate line for each conversion: Conversion Year | Amount Converted | Five-Year Deadline | Status. Your custodian will also issue Form 8606 (Nonqualified Distributions of IRA Contributions), which is part of your tax return and serves as an official record.

The IRS Ordering Rule: Which Money Comes Out First?

The IRS dictates a strict withdrawal order, known as “pro-rata” or aggregation, though it is often called FIFO (first in, first out) for conversions:

1. Contributions exit first (always penalty-free and tax-free)
2. Conversions exit next, in chronological order by conversion year (penalty-free and tax-free if the five-year hold is met; otherwise, a 10% penalty applies)
3. Earnings exit last (taxable and subject to a 10% early-withdrawal penalty if you are under 59½ and no exception applies)

You cannot pick and choose. If your Roth holds $50,000 in contributions, $30,000 in 2023 conversions, and $20,000 in earnings, and you withdraw $60,000, the IRS treats it as: $50,000 of contributions (tax-free, penalty-free) + $10,000 of the 2023 conversion (penalty-free if the five-year rule is met, but still penalty-free). The earnings stay put.

This ordering rule means you should never withdraw conversions early unless you can wait out the five-year period. Doing so triggers the 10% penalty on something you thought was “yours” because you already paid tax on it.

Tracking After a Conversion: A Worked Example

You have a traditional IRA with $40,000 of pre-tax contributions. You convert $25,000 to a Roth in January 2024. Here is your basis record after the conversion:

Fast forward to 2025. Your Roth now holds contributions ($15,000), the 2024 conversion ($25,000), plus $2,000 of earnings (growth). Total balance: $42,000.

If you withdraw $20,000 in 2025:

• First $15,000 comes from contributions (penalty-free, tax-free)
• Next $5,000 comes from the 2024 conversion (penalty-free, but only because you started the five-year clock in 2024; if this were 2025 withdrawals from a 2025 conversion, you’d owe a penalty)
• The $2,000 of earnings stays in the account

If instead you withdraw $40,000 in 2025:

• First $15,000 comes from contributions (penalty-free, tax-free)
• Next $25,000 comes from the 2024 conversion (penalty-free, since 2025 is within the five-year window after the 2024 conversion)
• The remaining $5,000 of the $40,000 withdrawal comes from earnings (taxable, plus a 10% penalty if you are under 59½)

The Pro-Rata Problem With Traditional IRA Conversions

There is a twist if you own both a traditional IRA and a Roth IRA and you do a conversion. The IRS uses a “pro-rata” rule that requires you to account for all of your IRAs combined when calculating how much of the conversion is taxable.

Suppose you have a traditional IRA with $100,000 of pre-tax contributions and $20,000 of after-tax contributions (perhaps from a failed Roth conversion attempt). The after-tax portion is basis in the traditional IRA. If you convert $10,000 to a Roth, the IRS says only $8,333 of it is truly “new” basis (the after-tax $20,000 divided by $120,000 total, times $10,000), and $1,667 is taxable.

This is the pro-rata rule, and it applies to the entire traditional IRA balance, not just the amount you are converting. Tracking basis across all accounts becomes essential. Keep a master record: traditional IRA balance (pre-tax and after-tax portions), SEP IRA balance, Roth basis (contributions and conversions by year), and the year of any conversion.

Documenting Basis: Form 8606 and IRA Custodian Records

The IRS requires you to file Form 8606 (Nonqualified Distributions of IRAs Contributions) when you:

• Make a nonqualified (non-Roth) distribution from a traditional, SEP, or SIMPLE IRA
• Receive a distribution from a Roth IRA that includes basis or earnings
• Do a conversion

Form 8606 is part of your federal income tax return (Form 1040) and serves as your official record of basis. Your custodian (the bank or brokerage holding the IRA) will also issue a Form 5498 reporting contributions and conversions made during the year. Cross-check the numbers.

If you have moved custodians over the years, gather all old statements and conversion documents. Basis is permanent—it does not expire or reset—so a conversion from 2010 is still basis in 2025. But you must have documentation.

Common Tracking Mistakes

Not separating conversions by year. If you do multiple conversions and do not track which conversion was in which year, the five-year rule becomes murky, and you may accidentally withdraw a young conversion and incur a penalty.

Forgetting direct contributions over decades. After 20 years of $5,000 annual contributions, you may lose track of the cumulative basis. Rebuild it from old Forms 5498, or contact your custodian for a historical accounting.

Confusing basis with earnings. Many investors assume all of their Roth balance is “safe” to withdraw. It is not. Only the basis portion (contributions + conversions) is truly penalty-free; earnings are locked until 59½ (with exceptions).

Ignoring the pro-rata rule. If you own a traditional IRA and a Roth, and you have never properly tracked the after-tax versus pre-tax split in the traditional account, a conversion can be unexpectedly taxable. Fix this before you convert.

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