Early withdrawal Roth IRA basis documentation

[wbarnett]

I tried searching for this in existing posts, but couldn't find a satisfactory answer. My goal is to execute the backdoor 401k-to-Roth IRA conversion strategy for early retirement in several years. I would like to know what sort of documentation early retirees in this situation keep long-term for their Roth IRA basis. My understanding (from a bogleheads forum thread several years ago) is that there may be at least three types of transactions to track on a yearly basis, each with corresponding contribution/withdrawal amounts:

1) Regular after-tax contributions
2) Taxable conversions (e.g., 401k)
3) Non-taxable conversions (e.g., Roth 401k)

Some of this information is captured by the 1099-R, but not all of it. I believe that financial institutions have to report the total yearly contributions, so presumably the IRS has that somewhere. Do people just keep all of the the 1099-Rs, year-end statements from the institutions, and any rollover/conversion paperwork necessary until 59.5? That's a whole lot of paperwork. Thanks in advance.

[secondcor521]

I believe that the basis information is sent to the taxpayer annually by the custodian who performed the transaction on Form 5498.  It's usually sent in May of the following year.  So all you would need is one Form 5498 per year in which a basis-creating transaction occurred.

You might also need Form 8606 for each year in which a withdrawal from an account with basis occurred.  Form 8606 is two pages long.

I'm not 100% sure on this, though.  I'd recommend reading through the instructions for Form 8606 and see what sort of records are used to generate the line items there.

Personally I don't have the Form 5498's any more.  But I do have a spreadsheet that I created with Vanguard's help, and I have my Form 8606's.  I hope that is sufficient.

[wbarnett]

Thanks for the info. Are you currently withdrawing contributions from your Roth IRA before 59.5? Or are you just keeping paperwork for anticipated early withdrawals?

Maybe I'm overthinking it, but I withdrew some of my Roth IRA contributions for a first time home purchase, and T. Rowe Price specifically mentioned that they report that to the IRS (not surprising). I would assume that if I retire in my early 40s, and take 15 years of what appear to be early withdrawals, that might trigger some extra IRS scrutiny. So I'd like to make sure I have documentation figured out beforehand.

[secondcor521]

The latter.  I am 49.5 and depending on how things go have about 7 or 8 years of expenses in my taxable account and Roth contributions.

If you made the home purchase this year, then yes, I would imagine that TRP would send a notice of the withdrawal amount to the IRS.  As you know there is an exemption for this, up to $10K I believe.  I've never done that, but I think you'll report it on your taxes so it matches up with what the IRS is expecting.

And yes, if you take early withdrawals from your Roth, those will also be reported to the IRS by TRP, I believe on 1099-R.  You'll provide the appropriate information to the IRS on Form 8606, Part III I think.

I'd recommend familiarizing yourself with Form 8606 and its instructions.  I think the instructions are pretty confusing, but if you go slow and know what the law is you should be able to get it right.  Also, there are examples out there on the web of Form 8606's filled out by people in our shoes, and those are helpful to understand where the numbers should go.

[wbarnett]

Sounds good. I took the distribution for the home purchase a few years ago (only $4k), and used HR Block software for taxes -- so I didn't actually fill out Form 8606 manually. I'll familiarize myself with the form. Thanks for the info.