What is ira basis?

IRA basis refers to the total amount of contributions made to an Individual Retirement Account (IRA) that have not been taxed. This includes both individual contributions and employer contributions.

The IRA basis is important because it determines the tax treatment of distributions from the account. When funds are withdrawn from a traditional IRA, any portion that represents the IRA basis is considered a return of principal and is not subject to income tax. However, any earnings or gains on the contributions are subject to tax when withdrawn.

It is crucial for IRA owners to keep track of their basis in order to accurately report their distributions and avoid paying unnecessary taxes. The basis can be calculated by adding up all contributions made to the account over the years. Additionally, individuals who have made non-deductible contributions to their IRA must keep careful records of these contributions to determine their basis accurately.