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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Gone Fishing on December 02, 2014, 01:31:18 PM

Title: Anyone been challenged by the IRS on ROTH contribution withdrawals before 59.5?
Post by: Gone Fishing on December 02, 2014, 01:31:18 PM
I worry about documenting all the contributions and withdrawals on my ROTH after ER to ensure I am withdrawing contributions vs earnings.  Does the IRS keep a running total of contributions back the origination of your ROTH?  Has anyone ever been audited on account of ROTH withdrawals?
Title: Re: Anyone been challenged by the IRS on ROTH contribution withdrawals before 59.5?
Post by: skunkfunk on December 03, 2014, 10:17:09 AM
I was told by the person on the phone at Vanguard to just tell them what I was trying to do and they'd take care of it on the tax info they have to send out every year. Or something.
Title: Re: Anyone been challenged by the IRS on ROTH contribution withdrawals before 59.5?
Post by: BigRed on December 03, 2014, 10:31:18 AM
What if you rolled your Roth into Vanguard from somewhere else?  What documentation do you need?
Title: Re: Anyone been challenged by the IRS on ROTH contribution withdrawals before 59.5?
Post by: skunkfunk on December 03, 2014, 10:34:31 AM
What if you rolled your Roth into Vanguard from somewhere else?  What documentation do you need?

Must you make everything so complicated???

I say this because I am now thoroughly stumped.
Title: Re: Anyone been challenged by the IRS on ROTH contribution withdrawals before 59.5?
Post by: solon on December 03, 2014, 10:59:59 AM
A stumped skunk funk?
Title: Re: Anyone been challenged by the IRS on ROTH contribution withdrawals before 59.5?
Post by: geekette on December 03, 2014, 11:12:45 AM
You don't report it to the IRS, but some tax prep software does track it for you.  TurboTax does (assuming you fill in the info over the years, that is). 
Title: Re: Anyone been challenged by the IRS on ROTH contribution withdrawals before 59.5?
Post by: skyrefuge on December 03, 2014, 11:44:26 AM
Yes, the IRS keeps track of your Roth contributions, which are reported to it each year in which you make a contribution, by your custodian via Form 5498 (https://turbotax.intuit.com/tax-tools/tax-tips/Taxes-101/What-Is-IRS-Form-5498-/INF14779.html). The instructions for Form 8606 (http://www.irs.gov/pub/irs-pdf/i8606.pdf) also say that you need to hang onto the copy of this form in your own records ("What Records Must I Keep?")

When actually making an early (technically, "unqualified") withdrawal from your Roth IRA, you include the withdrawal amount on line 19 of Form 8606, while line 22 gets the amount of your accumulated contributions. As long as line 22 is greater than line 19, you pay no tax or penalty. There is a worksheet included to recalculate the amount of those accumulated contributions (generally subtracting any withdrawals you have made in previous years from the sum of your Form 5498 reports).

http://www.mymoneyblog.com/can-i-really-withdraw-my-roth-ira-contributions-at-any-time-without-tax-or-penalty.html

So although it does potentially rely on many years of records all being correct, the mechanisms for tracking everything seem to be in place and there shouldn't be a big concern about it.
Title: Re: Anyone been challenged by the IRS on ROTH contribution withdrawals before 59.5?
Post by: catccc on December 03, 2014, 12:59:57 PM
So... what happens if you don't keep all of your 5498s?  I don't know that I've kept all of mine.  I know I've maxed out my roth contribution every year since 2002, so I do know what my contributions are.  I guess I have to go back to American Funds (I've since moved to vanguard) and get copies of them...

Just checked, my AF account login still works and I was able to snag 2008 through 2013.  So I need 2002-2007 and I'll be good to go.  I guess I'll call them up and see if they can provide copies.
Title: Re: Anyone been challenged by the IRS on ROTH contribution withdrawals before 59.5?
Post by: skyrefuge on December 03, 2014, 02:22:52 PM
So... what happens if you don't keep all of your 5498s?

I would guess that your custodian also keeps that information, and when you transfer from one custodian to another, the total contribution amount (if not the individual 5498s) are transferred over as well. But while you're talking to them, maybe you could ask? :-)
Title: Re: Anyone been challenged by the IRS on ROTH contribution withdrawals before 59.5?
Post by: Dezrah on December 03, 2014, 02:31:42 PM
I'm going to chime in here and point out that from the government's perspective, they only really "check" your Roth contributions and withdrawals once a year when you file taxes.  You are allowed to temporarily withdraw funds, and as long as you put them back before you next file taxes, the government doesn't care.

This is clever (but potentially risky) way to "borrow" from yourself if you get in a crisis.  Unlike borrowing from a 401k, you don't owe the balance when you leave your job.  And unlike 0% credit cards, you are only risking missed gains and dividends, but not fees and interest.