Author Topic: ROTH basis question  (Read 519 times)

GoCubsGo

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ROTH basis question
« on: February 19, 2020, 10:20:16 AM »
Ok, so back in the late 90's when I was in my mid 20's I got a severance bonus that was given in to us in our IRA.   I had heard about a new thing called a Roth conversion.  I used the provision that allowed me to spread the conversion amount over 4 years for tax purposes (anyone remember this rule when Roth first began ?) 

Anywhoo, now that FIRE is within sight, I started thinking about how I'd fund the first 5 years of retirement before laddering Roth conversions and this Roth may be needed.  I realized I have a *vague* idea of what my basis is but don't know it exactly.  My questions are:

- When I go to actually use the Roth account, what type of reporting is done on my taxes?  Do I need to know my EXACT basis of what I put in as that is the only amount I will be able to withdraw (not the gains since I'm in my 40's).  Say the amount of original contribution was roughly $50K.  Can I just withdraw $50K that first year of retirement or do I need nail it down to the penny.

Thoughts?

MustacheAndaHalf

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Re: ROTH basis question
« Reply #1 on: February 19, 2020, 10:29:16 AM »
Your Roth contributions should be reported to you on IRS form 5498.  Your contributions are your basis.

Contributions only matter if you don't wait 5 years, and/or start withdrawing before age 59.5.  Fulfill both conditions, and it's entirely tax free.  Break those requirements, and you owe a 10% penalty.  Can you wait until age 59.5 to take withdrawals?

GoCubsGo

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Re: ROTH basis question
« Reply #2 on: February 19, 2020, 10:50:39 AM »
I guess that's the dilemma, the markets growth the past few years has potentially moved up my FIRE  timeline which is the good news.  The bad news is that I'm short after-tax money to tap  for the first 5 years of retirement.  This Roth would potentially pay for the majority of one years expenses.  I could also possibly sell a rental home and get a couple years of expenses as well.  I will need to weigh the advantages and disadvantages.  I hope I still have my tax returns from 20+ years ago to find my basis as it sounds like I need to know the exact amount.

erutio

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Re: ROTH basis question
« Reply #3 on: February 19, 2020, 12:23:34 PM »
Your Roth contributions should be reported to you on IRS form 5498.  Your contributions are your basis.

Contributions only matter if you don't wait 5 years, and/or start withdrawing before age 59.5.  Fulfill both conditions, and it's entirely tax free.  Break those requirements, and you owe a 10% penalty.  Can you wait until age 59.5 to take withdrawals?

Minor correction:  Contributions can be withdrawn from a Roth at any time, tax-free and penalty-free.  It's your traditional IRA conversions that must age 5 years before you can withdraw penalty free.

Also, the 5 year clock is calendar years.  Ie., not 60 months, but you can technically withdraw 4 years and 1 day later, if you converted on 12/31 .

appleshampooid

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Re: ROTH basis question
« Reply #4 on: February 19, 2020, 12:44:14 PM »
Ok, so back in the late 90's when I was in my mid 20's I got a severance bonus that was given in to us in our IRA.   I had heard about a new thing called a Roth conversion.  I used the provision that allowed me to spread the conversion amount over 4 years for tax purposes (anyone remember this rule when Roth first began ?) 

Anywhoo, now that FIRE is within sight, I started thinking about how I'd fund the first 5 years of retirement before laddering Roth conversions and this Roth may be needed.  I realized I have a *vague* idea of what my basis is but don't know it exactly.  My questions are:

- When I go to actually use the Roth account, what type of reporting is done on my taxes?  Do I need to know my EXACT basis of what I put in as that is the only amount I will be able to withdraw (not the gains since I'm in my 40's).  Say the amount of original contribution was roughly $50K.  Can I just withdraw $50K that first year of retirement or do I need nail it down to the penny.

Thoughts?
To the reporting requirement, if you withdraw from a Roth IRA early, you will be filing form 8606 with your tax return that year, part III. Line 22 is where you report your basis from contributions. Line 24 you report basis from conversions, which I think would apply in this case based on your situation. You subtract these amounts from your distribution and if it's negative or zero (you haven't withdraw more than them), you are good and don't owe taxes.

As MustacheAndaHalf noted, your custodian should have sent you form 5498 for the years you contributed/converted, showing the amounts. Of course, with Roth IRAs, this amount isn't noted anywhere on your return so if you didn't save the forms, you may not know the exact amounts.

Could you fudge lines 22/24 and just under-estimate a bit to cover yourself? Probably. I doubt the IRS knows the exact number either, although theoretically they would have gotten all those same 5498 forms. Notably, the IRS considers all Roth IRAs to be one big chunk of money, and contributions come out first (tax and penalty-free), prior to conversions. So if you have contributed to Roths in the intervening years, you have all of those contributions as well to withdraw.
« Last Edit: February 19, 2020, 12:53:24 PM by appleshampooid »