Roth IRA Basis - Need to track?

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abuss368
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Roth IRA Basis - Need to track?

Post by abuss368 » Fri Mar 08, 2019 11:21 pm

Bogleheads -

If one has the account open for 5 years or greater and never takes a distribution before age 59.5 years, is there any need to track the Roth IRA basis that over the years would include contributions, conversion contributions, and rollover contributions?
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pdavi21
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Re: Roth IRA Basis - Need to track?

Post by pdavi21 » Fri Mar 08, 2019 11:46 pm

At a minimum, you should take the time to download the 5498s (or whatever number the form is). File them with your tax documents.

But probably not...unless the IRS gets involved.

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Re: Roth IRA Basis - Need to track?

Post by SoAnyway » Sat Mar 09, 2019 1:37 am

pdavi21 wrote:
Fri Mar 08, 2019 11:46 pm
At a minimum, you should take the time to download the 5498s (or whatever number the form is). File them with your tax documents.
But probably not...unless the IRS gets involved.
Or unless the tax laws change. And they might. As anyone filing their returns this year knows(!). Sometimes for better, sometimes for worse - depending on your specific situation. SoAnyway....

OP, I'd keep everything - and I do, in electronic form which takes very little effort and space. I hope I'll never need these records, but over the past many years I've watched many government promises become "means-tested" that never were in the past. It's against forum rules to discuss potential legislation, and for the record, I don't know if there are any bills or any movement in Congress to go back on the government's promise of tax-free growth and withdrawals of Roth funds - whether for all, or for most, or for a high net worth minority. I've no interest in such things until signed by a POTUS. That said, it's not completely out of the realm of possibility for any or all of those to occur. Meh, hope for the best but prepare for the worst. ; )

Bottom line: If you are basing your personal document retention policy on the assumption that the tax laws will never change between now and when you pass on, I regret to inform you that you are likely to be disappointed w/r/t the latter, and hope for your sake that any changes don't impact your approach to the former. We plan as best we can, but our elected scholars in DC are outside our control. I'm in my 50s and have seen many changes; I can only imagine the stories that those of Mr. Larimore's generation could tell re. plans gone awry due to unexpected changes. When dealing with the Service, I've always been SOOO happy to have been a good recordkeeper.... YMMV.
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retiredjg
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Re: Roth IRA Basis - Need to track?

Post by retiredjg » Sat Mar 09, 2019 8:28 am

abuss368 wrote:
Fri Mar 08, 2019 11:21 pm
Bogleheads -

If one has the account open for 5 years or greater and never takes a distribution before age 59.5 years, is there any need to track the Roth IRA basis that over the years would include contributions, conversion contributions, and rollover contributions?
The way you have asked the question it sounds like the person does not intend to take a distribution before 59.5 years old rather than already being at least 59.5 years old.

If the person has not reached 59.5, my answer would be it needs to be tracked. If the person is over 59.5, I'd keep a document or two proving the 5 year age of the Roth IRA and probably discard the rest.

This (age 59.5 and 5 years) is not something I think tax laws will change retroactively because it would impossible for people to comply.

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Re: Roth IRA Basis - Need to track?

Post by HereToLearn » Sat Mar 09, 2019 3:13 pm

What sort of documentation would you all suggest retaining? My 20-something children have funded own Roth IRAs, but have never filed a tax form confirming this. What should they be doing? Might as well recreate the paper trail now while we can.

Thanks!

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Re: Roth IRA Basis - Need to track?

Post by retiredjg » Sat Mar 09, 2019 3:32 pm

HereToLearn wrote:
Sat Mar 09, 2019 3:13 pm
What sort of documentation would you all suggest retaining? My 20-something children have funded own Roth IRAs, but have never filed a tax form confirming this. What should they be doing? Might as well recreate the paper trail now while we can.

Thanks!
Yes, they should start now. A sheet of paper will work. Or a spread sheet. Keep documents that show money going into Roth IRA. The form 5498 that comes in May should be handy for a lot of things. 1099 or Form 8606 if those things are involved.

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Epsilon Delta
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Re: Roth IRA Basis - Need to track?

Post by Epsilon Delta » Sat Mar 09, 2019 7:45 pm

There's a Pub for that. See "What Records Must I keep?" in the instructions for form 8606.

I suspect those requirements are actually overkill, in that I don't believe that the failure to keep a record is an offense if the facts it would establish are not relevant. However the IRS asks so I follow. The binder might reach an half an inch thick by the time I die and perhaps an inch when my as yet unconcieved grand nieces finally close the account.

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Re: Roth IRA Basis - Need to track?

Post by ThankYouJack » Sat Mar 09, 2019 8:21 pm

I may take a distribution before age 59.5. But I'm confused, doesn't Vanguard track the basis under Unrealized gains and losses? Couldn't that be used to figure out how much one has contributed? Or just look at the transaction history?

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Re: Roth IRA Basis - Need to track?

Post by rkhusky » Sat Mar 09, 2019 9:27 pm

ThankYouJack wrote:
Sat Mar 09, 2019 8:21 pm
I may take a distribution before age 59.5. But I'm confused, doesn't Vanguard track the basis under Unrealized gains and losses? Couldn't that be used to figure out how much one has contributed? Or just look at the transaction history?
I just checked and Vanguard does have my entire transaction history back to my first contribution in 1998. However, I still like to keep a separate record myself, in case something happens to Vanguard's records.

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Epsilon Delta
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Re: Roth IRA Basis - Need to track?

Post by Epsilon Delta » Sat Mar 09, 2019 9:34 pm

ThankYouJack wrote:
Sat Mar 09, 2019 8:21 pm
I may take a distribution before age 59.5. But I'm confused, doesn't Vanguard track the basis under Unrealized gains and losses? Couldn't that be used to figure out how much one has contributed? Or just look at the transaction history?
Vanguard does not track the basis. They can't because they don't know about other Roths at other custodians. Unrealized gains and losses are reported as if this were a taxable account and have no meaning for taxes here.

You could figure this out from the transaction history of all your Roth accounts, if you have those records. I do not trust any custodian to keep accurate and detailed long term records.

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Re: Roth IRA Basis - Need to track?

Post by Duckie » Sat Mar 09, 2019 10:00 pm

ThankYouJack wrote:But I'm confused, doesn't Vanguard track the basis under Unrealized gains and losses? Couldn't that be used to figure out how much one has contributed? Or just look at the transaction history?
What if five years from now you move your Roth IRA to a different custodian? Once you've closed the Vanguard account that information will be difficult if not impossible to retrieve. Keep your own records.

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Re: Roth IRA Basis - Need to track?

Post by HereToLearn » Sat Mar 09, 2019 11:17 pm

Thank you Epsilon Delta, retired JG, and others.

I have left the boys to their own devices with the Roths, other than explaining the importance to them and then reviewing how much they wish to contribute when I do their taxes each year. I have never looked at the mail Vanguard sends them, and I don't think they look at it either.

Both are still young so they can easily recreate the history. Many thanks for the links.

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Re: Roth IRA Basis - Need to track?

Post by ThankYouJack » Sun Mar 10, 2019 5:18 pm

Duckie wrote:
Sat Mar 09, 2019 10:00 pm
ThankYouJack wrote:But I'm confused, doesn't Vanguard track the basis under Unrealized gains and losses? Couldn't that be used to figure out how much one has contributed? Or just look at the transaction history?
What if five years from now you move your Roth IRA to a different custodian? Once you've closed the Vanguard account that information will be difficult if not impossible to retrieve. Keep your own records.
Good point. I never plan on closing the account but then I'd definitely want to track.
I started this thread - viewtopic.php?f=1&t=275273&newpost=4427 ... ead#unread
to see what I should file.

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Re: Roth IRA Basis - Need to track?

Post by abuss368 » Tue Mar 12, 2019 2:18 pm

pdavi21 wrote:
Fri Mar 08, 2019 11:46 pm
At a minimum, you should take the time to download the 5498s (or whatever number the form is). File them with your tax documents.

But probably not...unless the IRS gets involved.
I did this and have retained Form 5498 since the accounts were opened at Vanguard.
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Re: Roth IRA Basis - Need to track?

Post by lostdog » Tue Mar 12, 2019 2:43 pm

I had to go through my statements and some 5498 forms to find out my basis for contributions.

If I take out the distributions, I don't have all of the 5498 forms but have statements. If I get audited, I guess I'll have to pay the penalties because I don't have all of the 5498 forms.

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Re: Roth IRA Basis - Need to track?

Post by pshonore » Tue Mar 12, 2019 2:51 pm

HereToLearn wrote:
Sat Mar 09, 2019 3:13 pm
What sort of documentation would you all suggest retaining? My 20-something children have funded own Roth IRAs, but have never filed a tax form confirming this. What should they be doing? Might as well recreate the paper trail now while we can.

Thanks
Did they not receive Form 5498 from their broker with a copy to the IRS?

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Re: Roth IRA Basis - Need to track?

Post by Epsilon Delta » Tue Mar 12, 2019 3:39 pm

lostdog wrote:
Tue Mar 12, 2019 2:43 pm
I had to go through my statements and some 5498 forms to find out my basis for contributions.

If I take out the distributions, I don't have all of the 5498 forms but have statements. If I get audited, I guess I'll have to pay the penalties because I don't have all of the 5498 forms.
I'm not so sure about that. If audited you have to provide evidence. The statutes are silent over the exact type of evidence. There is probably regulations and precedence about what is required. If audited you could at least provide the statements and see what happens.

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Re: Roth IRA Basis - Need to track?

Post by Alan S. » Tue Mar 12, 2019 5:45 pm

Yes, the following from the 8606 Inst are definitely overkill. However, the IRS does use the term "verify", so this is the info they would accept should they ever ask. When it comes to Roth IRA basis, prior Forms 8606 reporting Roth distributions are listed.

Therefore, say you withdraw 20000 from your Roth IRA and you do not know your actual basis, except that it is well over 20000. Entering 20000 will make your distribution tax free, but would the IRS later claim that is your basis instead of some much higher amount that is your actual basis that you didn't keep track of? Did you just turn the rest of your IRA into earnings?
What Records Must I Keep?
To verify the nontaxable part of distributions from your IRAs, including Roth IRAs, keep a copy of the following forms and records until all distributions are made.
• Page 1 of Forms 1040 (or Forms 1040A, 1040NR, or 1040-T) filed for each year you made a nondeductible contribution to a traditional IRA.
• Forms 8606 and any supporting statements, attachments, and worksheets for all applicable years.
• Forms 5498, IRA Contribution Information, or similar statements you received each year showing contributions you made to a traditional IRA or Roth IRA.
• Forms 5498 or similar statements you received showing the value of your traditional IRAs for each year you received a distribution.
`Forms 1099 R

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Re: Roth IRA Basis - Need to track?

Post by lostdog » Tue Mar 12, 2019 5:57 pm

Alan S. wrote:
Tue Mar 12, 2019 5:45 pm
Yes, the following from the 8606 Inst are definitely overkill. However, the IRS does use the term "verify", so this is the info they would accept should they ever ask. When it comes to Roth IRA basis, prior Forms 8606 reporting Roth distributions are listed.

Therefore, say you withdraw 20000 from your Roth IRA and you do not know your actual basis, except that it is well over 20000. Entering 20000 will make your distribution tax free, but would the IRS later claim that is your basis instead of some much higher amount that is your actual basis that you didn't keep track of? Did you just turn the rest of your IRA into earnings?
What Records Must I Keep?
To verify the nontaxable part of distributions from your IRAs, including Roth IRAs, keep a copy of the following forms and records until all distributions are made.
• Page 1 of Forms 1040 (or Forms 1040A, 1040NR, or 1040-T) filed for each year you made a nondeductible contribution to a traditional IRA.
• Forms 8606 and any supporting statements, attachments, and worksheets for all applicable years.
• Forms 5498, IRA Contribution Information, or similar statements you received each year showing contributions you made to a traditional IRA or Roth IRA.
• Forms 5498 or similar statements you received showing the value of your traditional IRAs for each year you received a distribution.
`Forms 1099 R

I take "Form 5498 OR similar statements" as if you don't have your form 5498, they'll accept statements?

So let's say you were tracking your contributions on a spread sheet. Your total contributions are $20,000. For some reason you cannot retrieve forms for an old $5000 contribution. Does this mean your basis is now $15,000 because you cannot prove it?

I would think most Americans are not diligent enough to keep this stuff. You're pretty much screwed if you don't keep track and all of a sudden you need some of your contributions back for a big emergency. The individual then takes out $20,000, reports it as the basis on 8606, gets audited by the IRS, gets slapped with a fine, 10% tax penalty and then taxed as regular income on the $5,000 because they were missing the forms for that one contribution.

All the marketing about Roth IRA's and they never tell you this. The money you cannot prove as contributions is tied up until 59 1/2 because you cannot prove it. The downside of Roth IRA's.

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Re: Roth IRA Basis - Need to track?

Post by megabad » Tue Mar 12, 2019 7:52 pm

lostdog wrote:
Tue Mar 12, 2019 5:57 pm
I take "Form 5498 OR similar statements" as if you don't have your form 5498, they'll accept statements?

So let's say you were tracking your contributions on a spread sheet. Your total contributions are $20,000. For some reason you cannot retrieve forms for an old $5000 contribution. Does this mean your basis is now $15,000 because you cannot prove it?

I would think most Americans are not diligent enough to keep this stuff. You're pretty much screwed if you don't keep track and all of a sudden you need some of your contributions back for a big emergency. The individual then takes out $20,000, reports it as the basis on 8606, gets audited by the IRS, gets slapped with a fine, 10% tax penalty and then taxed as regular income on the $5,000 because they were missing the forms for that one contribution.

All the marketing about Roth IRA's and they never tell you this. The money you cannot prove as contributions is tied up until 59 1/2 because you cannot prove it. The downside of Roth IRA's.
It is my opinion that what I call 1st generation tax documents hold the most weight in the IRS (original paper W2s, 1099s, 5498s). I would think paper statements would be slightly less preferable, but still usable in most circumstances.

Really it isn't important unless the IRS challenges something you do (and they may never do so). At that point you are guilty until proven innocent. If you cannot prove you don't owe what they say you owe to legal satisfaction, than you owe it.

I have a simple philosophy with tax related documents. Keep everything. Forever. In paper form. Worst case, you can throw all the paper at the IRS agents and run out the door real quick.

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Re: Roth IRA Basis - Need to track?

Post by lakpr » Tue Mar 12, 2019 8:49 pm

Not sure if any other state in the US does this, but New Jersey treats any withdrawal from a Roth IRA prior to age 59.5 as a proportional withdrawal of the contribution and the gains. So for state tax purposes at least, until the account holder reaches age 59.5, one must track the basis in a Roth IRA.

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Re: Roth IRA Basis - Need to track?

Post by Epsilon Delta » Tue Mar 12, 2019 9:06 pm

megabad wrote:
Tue Mar 12, 2019 7:52 pm
It is my opinion that what I call 1st generation tax documents hold the most weight in the IRS (original paper W2s, 1099s, 5498s).
There is at least a little bit of irony in that these are forms the IRS already has, so they shouldn't tell the IRS anything they don't already know.

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Re: Roth IRA Basis - Need to track?

Post by megabad » Tue Mar 12, 2019 10:20 pm

Epsilon Delta wrote:
Tue Mar 12, 2019 9:06 pm
megabad wrote:
Tue Mar 12, 2019 7:52 pm
It is my opinion that what I call 1st generation tax documents hold the most weight in the IRS (original paper W2s, 1099s, 5498s).
There is at least a little bit of irony in that these are forms the IRS already has, so they shouldn't tell the IRS anything they don't already know.
I don't really think it is ironic. You gave the exact reason why I think they are the best documents. Basically, if you can instantly show that the IRS isn't using the right numbers from their own original forms, any argument with them should be quickly handled. Believe it or not, I have had disagreements with the IRS that are essentially at this level.

It is a little easier to imagine this happening when you are older. It is less likely the IRS has good, organized, legible copies of 50 year old tax documents. In fact, I have been informed by the IRS that they regularly throw out certain documentation immediately upon receipt if they don't want to process it or don't think they need it. They have actually thrown out critical parts of my tax filings before and I had to resubmit. They were gracious enough to extend the deadline for me that year...

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Re: Roth IRA Basis - Need to track?

Post by DrGoogle2017 » Wed Mar 13, 2019 1:06 am

HereToLearn wrote:
Sat Mar 09, 2019 3:13 pm
What sort of documentation would you all suggest retaining? My 20-something children have funded own Roth IRAs, but have never filed a tax form confirming this. What should they be doing? Might as well recreate the paper trail now while we can.

Thanks!
I only keep track in a separate spreadsheet for my kids. But I believe the brokerage has it by year. I went back 10 years for one of my daughters on Vanguard.

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Re: Roth IRA Basis - Need to track?

Post by lostdog » Wed Mar 13, 2019 7:30 am

Epsilon Delta wrote:
Tue Mar 12, 2019 9:06 pm
megabad wrote:
Tue Mar 12, 2019 7:52 pm
It is my opinion that what I call 1st generation tax documents hold the most weight in the IRS (original paper W2s, 1099s, 5498s).
There is at least a little bit of irony in that these are forms the IRS already has, so they shouldn't tell the IRS anything they don't already know.
Let's say you closed an account at Fidelity and oooops!, You do not have the 5498 form or statements for those few years of contributions. Can you request the 5498 forms from the IRS? Are you screwed?

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Re: Roth IRA Basis - Need to track?

Post by retiredjg » Wed Mar 13, 2019 8:08 am

lostdog wrote:
Wed Mar 13, 2019 7:30 am
Let's say you closed an account at Fidelity and oooops!, You do not have the 5498 form or statements for those few years of contributions. Can you request the 5498 forms from the IRS? Are you screwed?
Yes, you can request forms from the IRS, but their assistance may be limited unless you are looking for recent forms.

https://www.irs.gov/individuals/get-transcript

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Re: Roth IRA Basis - Need to track?

Post by lostdog » Wed Mar 13, 2019 8:16 am

retiredjg wrote:
Wed Mar 13, 2019 8:08 am
lostdog wrote:
Wed Mar 13, 2019 7:30 am
Let's say you closed an account at Fidelity and oooops!, You do not have the 5498 form or statements for those few years of contributions. Can you request the 5498 forms from the IRS? Are you screwed?
Yes, you can request forms from the IRS, but their assistance may be limited unless you are looking for recent forms.

https://www.irs.gov/individuals/get-transcript
Retiredjg,

Thank you for this. I am missing a few 5498 forms so I will persue this avenue. Bogleheads save the day again.

:sharebeer

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Re: Roth IRA Basis - Need to track?

Post by Grogs » Wed Mar 13, 2019 8:22 am

I've lost records for 2-3 years of contributions in the late 90s. I've moved my Roth IRA twice during the intervening years. Given the age of those contributions, I doubt that I could recover those records easily (if at all). The good news is that the limits were only about $2k/yr back then, but I consider that basis to be lost. Most likely I won't be withdrawing from the Roth until after 59.5, so it probably won't have any impact on me.

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Re: Roth IRA Basis - Need to track?

Post by nolesrule » Wed Mar 13, 2019 8:59 am

I'm missing 5498s from 2002 to 2004 for my Roth IRAs, and I shredded the statements years ago not relaizing I might need them. However I mirrored every transaction in MS Money and so have the contribution data in a spreadsheet. It's not much compared to the overall contributions and conversions, so I'm not going to worry about it one way or the other if it were to be questioned... not that I'm planning to access the funds for non-qualified distributions.

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Re: Roth IRA Basis - Need to track?

Post by HereToLearn » Wed Mar 13, 2019 4:30 pm

DrGoogle2017 wrote:
Wed Mar 13, 2019 1:06 am
HereToLearn wrote:
Sat Mar 09, 2019 3:13 pm
What sort of documentation would you all suggest retaining? My 20-something children have funded own Roth IRAs, but have never filed a tax form confirming this. What should they be doing? Might as well recreate the paper trail now while we can.

Thanks!
I only keep track in a separate spreadsheet for my kids. But I believe the brokerage has it by year. I went back 10 years for one of my daughters on Vanguard.
Thank you! I told my son what to look for and he was able to download the document from Vanguard's website. Only a few years in so far, but thanks again!

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Re: Roth IRA Basis - Need to track?

Post by abuss368 » Wed Mar 13, 2019 4:54 pm

Essentially if one does not take any distributions before age 59.5 there is no need to track basis correct?

After age 59.5 can the Form 5498 documents be disposed?
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Re: Roth IRA Basis - Need to track?

Post by StandingRock » Wed Mar 13, 2019 4:56 pm

abuss368 wrote:
Wed Mar 13, 2019 4:54 pm
Essentially if one does not take any distributions before age 59.5 there is no need to track basis correct?

After age 59.5 can the Form 5498 documents be disposed?
I'm pretty sure after 59 1/2 all distributions are qualified.

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Re: Roth IRA Basis - Need to track?

Post by retiredjg » Wed Mar 13, 2019 5:01 pm

abuss368 wrote:
Wed Mar 13, 2019 4:54 pm
Essentially if one does not take any distributions before age 59.5 there is no need to track basis correct?
Well yes ...if you are certain there will be no need to take a distribution. How could anyone be certain of that until they actually reach 59.5 years old?

After age 59.5 can the Form 5498 documents be disposed?
I'd keep 1 that is at least 5 years old unless your assets are at a place that shows transactions for at least 5 years.

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Re: Roth IRA Basis - Need to track?

Post by abuss368 » Wed Mar 13, 2019 7:18 pm

retiredjg wrote:
Wed Mar 13, 2019 5:01 pm
abuss368 wrote:
Wed Mar 13, 2019 4:54 pm
Essentially if one does not take any distributions before age 59.5 there is no need to track basis correct?
Well yes ...if you are certain there will be no need to take a distribution. How could anyone be certain of that until they actually reach 59.5 years old?

After age 59.5 can the Form 5498 documents be disposed?
I'd keep 1 that is at least 5 years old unless your assets are at a place that shows transactions for at least 5 years.
Please explain second point in more detail.

Thanks!
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Re: Roth IRA Basis - Need to track?

Post by Epsilon Delta » Wed Mar 13, 2019 10:43 pm

abuss368 wrote:
Wed Mar 13, 2019 7:18 pm
retiredjg wrote:
Wed Mar 13, 2019 5:01 pm
After age 59.5 can the Form 5498 documents be disposed?
I'd keep 1 that is at least 5 years old unless your assets are at a place that shows transactions for at least 5 years.
Please explain second point in more detail.
There are two requirements for a qualified distribution (which is tax and penalty free).
  1. You are 59.5 years old (or disabled, or dead)
  2. Your Roth is more than 5 years old. [more or less].
If you are audited, the first can be proved with your birth certificate. Retiredjg is suggesting keeping documentation about the second. I think that's probably a good idea. Although 5 years ago is fairly recent history and I would expect you could find some evidence from custodians etc if push came to shove even if you don't keep it yourself, but if you keep an old record it would be easier.

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Re: Roth IRA Basis - Need to track?

Post by retiredjg » Thu Mar 14, 2019 7:04 am

Yes, that's what I meant. Say if you moved your Roth IRA from one place to another last year, they would not have records showing that your Roth IRA was started at least 5 years ago. In a case like that, I'd keep at least 1 document from more than 5 years ago.

The likelihood of needing this is mighty small - the IRS has these records too. But it's just not that hard to keep one.

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Re: Roth IRA Basis - Need to track?

Post by abuss368 » Thu Mar 14, 2019 9:42 am

retiredjg wrote:
Thu Mar 14, 2019 7:04 am
Yes, that's what I meant. Say if you moved your Roth IRA from one place to another last year, they would not have records showing that your Roth IRA was started at least 5 years ago. In a case like that, I'd keep at least 1 document from more than 5 years ago.

The likelihood of needing this is mighty small - the IRS has these records too. But it's just not that hard to keep one.
Thank you!
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Re: Roth IRA Basis - Need to track?

Post by pshonore » Thu Mar 14, 2019 12:36 pm

Epsilon Delta wrote:
Wed Mar 13, 2019 10:43 pm
abuss368 wrote:
Wed Mar 13, 2019 7:18 pm
retiredjg wrote:
Wed Mar 13, 2019 5:01 pm
After age 59.5 can the Form 5498 documents be disposed?
I'd keep 1 that is at least 5 years old unless your assets are at a place that shows transactions for at least 5 years.
Please explain second point in more detail.
There are two requirements for a qualified distribution (which is tax and penalty free).
  1. You are 59.5 years old (or disabled, or dead)
  2. Your Roth is more than 5 years old. [more or less].
If you are audited, the first can be proved with your birth certificate. Retiredjg is suggesting keeping documentation about the second. I think that's probably a good idea. Although 5 years ago is fairly recent history and I would expect you could find some evidence from custodians etc if push came to shove even if you don't keep it yourself, but if you keep an old record it would be easier.
Silly question but do those rules also apply to inherited Roths?

Alan S.
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Re: Roth IRA Basis - Need to track?

Post by Alan S. » Thu Mar 14, 2019 1:05 pm

The documentation you should retain depends on HOW your Roth became qualified.

1) In the usual case, you have 5 years and reach 59.5 - your Roth will always be qualified and you need to retain less documentation. The 8606 Inst indicating to keep pretty much everything become overkill.

2) However, some taxpayers meeting the disability definition and report qualified distributions are not necessarily permanently qualified. The disability could be challenged or there could be enough recovery that you are no longer considered disabled. If you are not yet 59.5 when this occurs, then you must revert to the ordering rules, so will need those past records. Any new distributions would then have to reported on Form 8606 again.

This explains why the IRS Regs. for Roth distributions continue to refer to the ordering rules even when referring to qualified distributions. That didn't make much sense until you realize that if you are removed from disability qualification, the prior distributions you took now have to be assigned to your basis as usual. Retroactively, even though you will not be taxed during the period you were actually disabled (and also had the 5 years), coming off the disability you have to go back and determine how much basis you used, and that will determine how much basis you have available coming off the disability.

In any event, do not purge too much data if your Roth is qualified due to disability, unless you have also passed 59.5 and are sure that your disability cannot be challenged during the period you reported qualified distributions prior to 59.5.

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Duckie
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Re: Roth IRA Basis - Need to track?

Post by Duckie » Thu Mar 14, 2019 3:13 pm

pshonore wrote:
Epsilon Delta wrote:There are two requirements for a qualified distribution (which is tax and penalty free).
  1. You are 59.5 years old (or disabled, or dead)
  2. Your Roth is more than 5 years old. [more or less].
Silly question but do those rules also apply to inherited Roths?
No and maybe.
  1. You are required to take RMDs from inherited non-spouse Roth IRAs no matter your age so the 59.5 rule does not apply.
  2. If the inherited Roth IRA is less than five years old the earnings part of the distribution will be taxable but without penalties. Once the five-year requirement is met all distributions will be tax-free.

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Epsilon Delta
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Re: Roth IRA Basis - Need to track?

Post by Epsilon Delta » Thu Mar 14, 2019 4:36 pm

pshonore wrote:
Thu Mar 14, 2019 12:36 pm
Epsilon Delta wrote:
Wed Mar 13, 2019 10:43 pm
There are two requirements for a qualified distribution (which is tax and penalty free).
  1. You are 59.5 years old (or disabled, or dead)
  2. Your Roth is more than 5 years old. [more or less].
Silly question but do those rules also apply to inherited Roths?
A distribution from an inherited Roth has to meet the same rules to be a "qualified distribution". However note the "or dead" in the first part. This applies to the original owner, so an inherited Roth will meet this prong of the test. "Death" is also an exception to a the 10% early withdrawal penalty. So this penalty never applies to an inherited Roth.

The second prong (Roth over five years old) does need to be met for a qualified distribution, the five years date from the when the decedent established their first Roth, not the date of inheritance.

If a distribution is not-qualified the usual ordering rules apply -- contributions first, then conversions, then earning. As usual contributions and conversion are tax free and because of the "death" also penalty free. All contributions and conversions coming out tax and penalty free means that it would be very unlikely for RMD cause any tax to be due, if the proper paperwork is done.

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