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.