Tax-Free Asset Basis (Roth Accounts)

Why Roth IRAs and Roth 401(k)s have basis equal to account value

How it works

Tax-free accounts (Roth IRA, Roth 401k, HSA) are funded with after-tax dollars. All contributions and earnings grow tax-free, and qualified withdrawals are 100% tax-free. Basis always equals the full account value.

  1. 1. Basis Equals Value

    Since all money was taxed going in, all money is basis

    Basis = Account Value (always 100%)
    Example: $50k Roth IRA has $50k basis, even if only $30k was contributed

  2. 2. No Taxable Withdrawals

    Qualified withdrawals are entirely tax-free

    Taxable Amount = $0 (for qualified distributions)
    Example: Withdraw entire $50k Roth IRA → $0 taxable income

  3. 3. Growth is Tax-Free

    Earnings grow tax-free and are never taxed on withdrawal

    Future Basis = Future Value (grows together)
    Example: $30k contributions grow to $50k → entire $50k is basis and withdrawal is tax-free

Real-world context

Qualified Distribution Rules

Roth IRA distributions are qualified (tax-free) if you are age 59½ or older AND the account has been open for at least 5 years. Both conditions must be met. Stratum projections assume retirement-age distributions meet both criteria.

IRS reference: Publication 590-B - Roth IRA Distributions

Roth Conversion Ordering

Each Roth conversion has its own 5-year clock. Withdrawing converted amounts before the 5-year period results in a 10% penalty (before age 59½). Our projections assume proper aging.

HSA Triple Tax Advantage

HSAs offer a unique triple tax benefit: (1) contributions are tax-deductible, (2) growth is tax-free, and (3) withdrawals for medical expenses are tax-free. This makes HSAs among the most tax-advantaged account types available.

What drives the result

Roth IRA/401k Balance
Assets tab → Tax-Free Assets

Larger Roth balances provide more tax-free retirement income

$200k Roth IRA provides $200k of tax-free withdrawals vs Traditional IRA where ~25% would go to taxes

Roth Contributions
Base Data → Contributions

Builds tax-free assets for retirement

$7k annual Roth IRA contributions → ~$230k after 20 years at 8% return

Roth Conversion Amounts
Strategies → Roth Conversion

Converts taxable Traditional IRA dollars to tax-free Roth dollars

Converting $50k to Roth eliminates future taxes on that $50k and all growth

Assumptions

  • Withdrawals are qualified distributions (age 59½+ and account open 5+ years)
  • HSA distributions used for qualified medical expenses
  • Roth conversions aged properly (5-year rule satisfied)
  • No early withdrawal penalties apply

Limitations

  • Does not model ordering rules for non-qualified distributions (contributions first)
  • Does not track 5-year aging periods for conversions separately
  • Assumes all HSA distributions are for qualified medical expenses

Related

This page explains how Stratum models this calculation. It is educational material for financial professionals, not tax or legal advice, and tax law changes. Verify current figures against primary IRS sources before relying on them with a client.