Roth Contribution Withdrawals - How does the IRS know it's a contribution?

[NoEllipsis]

So this is my first year in FIRE and I have a bunch of ROTH contributions that I've made over the years. Now that I don't have regular W2 income I'd like to start taking that money out for [reasons].

My first question is, how does the IRS know that these withdrawals are contributions and not gains? When I withdrawal the funds does it trigger something at my brokerage (Fidelity) to send me a specific tax form about this?

I called Fidelity today to ask them for some guidance but they made it sound like these withdrawals are between me and the IRS. I can move the funds from my ROTH to my Brokerage but it was, "up to me to clarify that I was withdrawaling contributions with the IRS." Is this really how it works? Is there some separate form I have to submit saying "in 2012 I contributed $5000, I'd like to withdrawal that now."?

I'm hoping that somehow it's simpler than what I'm envisioning so some clarification would be great.



This sort of leads to my second question, my brokerage (Fidelity) only has my statements back to 2011 (10 years), so I only know my contributions for those years, but I know I have contributions leading back to some point in the late 90's. Does the IRS know this somehow or do I have to rely on past statements that I didn't save from over 20 years ago? I'm guessing the answer to the first question is the same answer to my second question....

Thanks in advance to anyone that can provide some insight!

[seattlecyclone]

When you take an early distribution from your Roth IRA you'll need to file a Form 8606 with your taxes. Part III is where you report your total basis from contributions and calculate how much of the distribution was taxable as a result. Your IRA custodian should have been reporting your contributions every year to the IRS (on Form 5498), and you should have received copies of this as well. Behind the scenes you should expect the IRS to compare what you report on your 8606 with the total of what has been reported on 5498s. Assuming these match, you should be good to go. If you report a basis higher than the IRS thinks you have, they could ask you to prove it (such as by providing 5498s or other records).

[NoEllipsis]

So I was looking around and I did see form 8606 which I figured I would need to fill out with my taxes, I guess that answers half of my question about taking out contributions.

I also looked at some of my past tax returns and never found a 5498 form. I do see that online it says that the 5498 form is mostly for informational purposes and not required to be submitted with my taxes. Unfortunately since it is not required, I'm guessing that's why TurboTax never guided me to submit that form with my taxes. I'm hoping that somewhere my IRA custodian submitted it behind the scenes so that this isn't an issue. Unfortunately the person I talked with at Fidelity today didn't seem like a tax expert in this area so I don't know if they are aware of everything that Fidelity does behind the scenes.

So I also did a ROTH conversion this year, that will also be part of the 8606 form. I'm guessing since I have the 8606 for the Roth Conversion, I won't also need the 5498 since that just seems like a form for new contributions not for conversions. I'm also guessing that the IRS will have a better track on the 8606 conversion than the 5498 forms that are not seemingly required.

[MoseyingAlong]

Form 5498 is an informational return filed by your IRA custodian. They file a copy with the IRS and send you a copy. It is not a form you complete with your tax return.

They are usually sent in April or May. I think the deadline is May 31st of each year.

Check your tax forms on Fidelity. They are probably there.
I don't have a Fidelity account anymore but I'd start by looking under near the statements. There should also be some tax forms.

ETA: Just looked under an old account. Tax Forms are under the Statements tab.

[NoEllipsis]

This was exactly what I needed, thanks!

Now it's just a matter of if I can get Fidelity to dig up old statements from over a decade ago. The other alternative is just to try to "estimate" my contributions in previous years and hope that I'm either: right, underestimated, or the IRS doesn't care to look into the difference of a few thousand dollars.

Thanks again to everyone in this forum, collectively you all always seem to point me in the right direction for the answers I need!

[secondcor521]

This was exactly what I needed, thanks!

Now it's just a matter of if I can get Fidelity to dig up old statements from over a decade ago. The other alternative is just to try to "estimate" my contributions in previous years and hope that I'm either: right, underestimated, or the IRS doesn't care to look into the difference of a few thousand dollars.

Thanks again to everyone in this forum, collectively you all always seem to point me in the right direction for the answers I need!

The expectation is that you, the taxpayer, are supposed to know to save those 5498s throughout the years so that you can properly fill out Part III of Form 8606 when you go to make Roth withdrawals.  You didn't, I didn't, and I suspect hardly anyone actually does this.

What I did a few years ago when I started realizing this is to go back through my records and reconstruct my contribution and conversion history.  I believe I used a combination of 5498's, old statements, and a confirming conversation with my IRA custodian.

I now keep that spreadsheet updated and keep a copy with my IRA records and my tax records.  I also obviously save my 5498s when I get them.

By the way, you'll get a 1099-R from your IRA custodian in late January showing the value of the Roth conversion.  Plug that into your tax software.  You may need to go through the extra step of completing Part II of Form 8606 for the conversion (I know I have to do this extra step in my tax software.)  That conversion amount may need to be included in line 24 of Part III; check the instructions to be sure.

[monkeymind]

This was exactly what I needed, thanks!

Now it's just a matter of if I can get Fidelity to dig up old statements from over a decade ago. The other alternative is just to try to "estimate" my contributions in previous years and hope that I'm either: right, underestimated, or the IRS doesn't care to look into the difference of a few thousand dollars.

Thanks again to everyone in this forum, collectively you all always seem to point me in the right direction for the answers I need!

My experience was with TD Ameritrade instead of Fidelity, but I spoke to a representative and, by the end of the day, they emailed a listing of all of my contributions from the opening of the account. I hope the experience at Fidelity is as easy for you.

[JJ-]

This was exactly what I needed, thanks!

Now it's just a matter of if I can get Fidelity to dig up old statements from over a decade ago. The other alternative is just to try to "estimate" my contributions in previous years and hope that I'm either: right, underestimated, or the IRS doesn't care to look into the difference of a few thousand dollars.

Thanks again to everyone in this forum, collectively you all always seem to point me in the right direction for the answers I need!

The expectation is that you, the taxpayer, are supposed to know to save those 5498s throughout the years so that you can properly fill out Part III of Form 8606 when you go to make Roth withdrawals.  You didn't, I didn't, and I suspect hardly anyone actually does this.

What I did a few years ago when I started realizing this is to go back through my records and reconstruct my contribution and conversion history.  I believe I used a combination of 5498's, old statements, and a confirming conversation with my IRA custodian.

I now keep that spreadsheet updated and keep a copy with my IRA records and my tax records.  I also obviously save my 5498s when I get them.

By the way, you'll get a 1099-R from your IRA custodian in late January showing the value of the Roth conversion.  Plug that into your tax software.  You may need to go through the extra step of completing Part II of Form 8606 for the conversion (I know I have to do this extra step in my tax software.)  That conversion amount may need to be included in line 24 of Part III; check the instructions to be sure.

I didn't either. Because I felt like I needed something, I went to the IRS website and downloaded all of the transcripts they had for the years beyond what vanguard kept for tax forms (last 7 years) for Roth contributions. Granted, the idea of using IRS's numbers to justify the contribution amount seems a bit funny in the event of a hypothetical audit, genre hey why don't your numbers match the numbers you provided me, but at least I have that at proof to support my spreadsheet of contribution totals.

[phildonnia]

My first question is, how does the IRS know that these withdrawals are contributions and not gains? When I withdrawal the funds does it trigger something at my brokerage (Fidelity) to send me a specific tax form about this?

Unqualified distributions from a Roth are assumed to take place in this order:
1) First, contributions and rollovers made more than five years ago
2) Then, rollovers of less than five years ago, in the order they were made
3) Then earnings.

You don't start taking any distributions from Bucket #3 until Bucket #1 and Bucket #2 are completely empty.  So, your initial withdrawals are almost certainly going to be mostly from contributions, and will be non-taxable.

I called Fidelity today to ask them for some guidance but they made it sound like these withdrawals are between me and the IRS. I can move the funds from my ROTH to my Brokerage but it was, "up to me to clarify that I was withdrawaling contributions with the IRS." Is this really how it works? Is there some separate form I have to submit saying "in 2012 I contributed $5000, I'd like to withdrawal that now."?

That is correct; it's on you to report this to the IRS.  And yes, there is a form.  On Form 8606, Part III, you will enter your "contribution basis".  (That's Bucket #1 above.)  Then you subtract your distribution.  If you still have contribution leftover, then it's assumed that your distribution came from the contributions.  Only when your contribution basis drops to zero do you start taking out earnings. 

This sort of leads to my second question, my brokerage (Fidelity) only has my statements back to 2011 (10 years), so I only know my contributions for those years, but I know I have contributions leading back to some point in the late 90's. Does the IRS know this somehow or do I have to rely on past statements that I didn't save from over 20 years ago? I'm guessing the answer to the first question is the same answer to my second question....

Yeah, you're going to have to research what your contribution was.  Remember, to the IRS, you only have one Roth IRA.  Multiple accounts, multiple brokerages, whatever; it's all the same IRA when you report your taxes.  Good luck!

Caveat: The above applies to unqualified distributions, and assumes you've had the Roth for five years.  If you're over age 59.5, then it's all free.  Also, this does not apply to "corrective distributions", in which you do distribute earnings.  And it goes without saying, this is general information which may not apply to your specific situation; consult a qualified tax professional for advice.

[secondcor521]

@phildonnia, I agree with most of what you wrote except it seems to me bucket 1 is just contributions, bucket 2 is all conversions oldest to newest, and bucket 3 is earnings.  This is based on a semi-cursory review of Form 8606 part III and the instructions for that form, particularly lines 22 and 24.

It also looks like the five year rule is just implemented in the instructions for what to enter for conversion basis (line 24), especially the last two pages.

[phildonnia]

@phildonnia, I agree with most of what you wrote except it seems to me bucket 1 is just contributions, bucket 2 is all conversions oldest to newest, and bucket 3 is earnings.  This is based on a semi-cursory review of Form 8606 part III and the instructions for that form, particularly lines 22 and 24.

You are correct; that is the way the tax form is organized. 

I think of "seasoned" rollovers in Bucket #1, in the sense that it is tax-free, unencumbered money for withdrawal, just lie contributions.  But I could see how that's confusing, compared to how the tax form lists everything.