So I'm considering taking a little out of my Roth (maybe $25k?). My understanding is that you can take out any contributions with no penalty. But if you take out any money that are part of the gains you have made, then that's when you get hit with a tax hit.

Do I have this right?

I guess my other question is, how does the IRS know the money you took out was actually just contributions so you don't get that tax hit?

BucketofBalls99 said:

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So I'm considering taking a little out of my Roth (maybe $25k?). My understanding is that you can take out any contributions with no penalty. But if you take out any money that are part of the gains you have made, then that's when you get hit with a tax hit.

Do I have this right?

I guess my other question is, how does the IRS know the money you took out was actually just contributions so you don't get that tax hit?

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You have to be able to prove with statements showing the contributions. I hope you keep paper statements or downloaded all of your previous statements showing contributions. I got into a pickle with the IRS a few years ago on this and they let me off when I cobbled together some low quality information that barely proved it was contributions.

Your investment house (Fidelity, Schwab, etc.) will send you a tax statement. File that with your taxes on Form 8606 to report that you are withdrawing contributions.

You've got the basics right. Roth IRA withdrawals come out in this order across all of your Roth IRAs combined: regular contributions first, then conversions and rollovers, and finally earnings. So if you have at least $25,000 of remaining regular contribution basis, you can take out $25,000 tax-free and penalty-free at any age.

There are some additional restrictions if the contributions we're made via backdoor roth/roll over if that applies to you. 5 year waiting period I believe.

Spot on. If any of the funds came from a conversion, each conversion has its own five-year clock and can trigger the 10% penalty under 59 even though you already paid the tax.

Do you know what your basis in the account is... i.e. have you kept (or have access to) the Form 5498 your custodian sent you each year you made a contribution?

When you take the distribution they will issue a 1099-R with code J " Early distribution from a Roth IRA, no known exception"

When you file your taxes you will file a form 8606 and on that form it will ask the total amount of contributions you made before the withdraw, you then reduce that amount by the 25k you took out and that becomes your new basis. You don't have the file the 5498s with the IRS (they should have already gotten a copy) but you should keep them for the 1 in a million chance you get a letter from the IRS asking to prove it.

I did this and kind of regret it. You'll never get that basis back.

Mine was like 3 rollovers worth so I have little back up to track it. I lost knew my basis was like 15% of total, so only pulled out about half the basis.

permabull said:

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Do you know what your basis in the account is... i.e. have you kept (or have access to) the Form 5498 your custodian sent you each year you made a contribution?

When you take the distribution they will issue a 1099-R with code J " Early distribution from a Roth IRA, no known exception"

When you file your taxes you will file a form 8606 and on that form it will ask the total amount of contributions you made before the withdraw, you then reduce that amount by the 25k you took out and that becomes your new basis. You don't have the file the 5498s with the IRS (they should have already gotten a copy) but you should keep them for the 1 in a million chance you get a letter from the IRS asking to prove it.

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Sorry, was busy all day today….

I do not know what my basis is offhand. I guess I'll have to see if I can go back and see about looking for those 5498s. I want to say I have some of them, but not sure if I have all of them.

Does a Roth 401K keep up with the contribution basis? I put in money woth each paycheck and have not been keeping track

This is a good reason to stick to a single custodian.

jamey said:

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Does a Roth 401K keep up with the contribution basis? I put in money woth each paycheck and have not been keeping track

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Yes. Download your statements

You didn't specify where the ROTH money is, so here's both:

ROTH 401ks keep up with your contribution basis at the plan level, but you are unable to specifically identify that you are withdrawing the ROTH portion if you were to take a withdrawal. They follow Pro-Rata rules (every withdrawal is split proportionately via pre-tax and ROTH money).

With a ROTH IRA, the above doesn't matter because the pre-tax and ROTH money are not commingled via one account. You can pull out contributions tax and penalty free, but beyond that is when the various 5 year rules/early withdrawal penalties before 59.5 come into play

If you do plan to withdraw your base contributions from a ROTH IRA, are statements from the custodian the only proof that the IRS will accept should they come calling?

I track all our finances in Quicken, so I can tell you right now how much I've contributed to my ROTH, but if I were to get questioned about a withdraw, I'm guessing the IRS isn't going to accept my Quicken report that shows my annual contribution amounts. When you go to Fidelity, they only keep statements going back 10 years, which doesn't capture all my basis. Any recommendations for how to handle this?

My Roth basis is a mess too. I am missing some of my early contribution forms bc I moved it from brokerage to brokerage and I don't think I have the basis from my Roth 401k I rolled into in it after switching jobs. I have enough to satisfy any reasonable withdrawal I would make before 59.5 but it was a lesson learned after 10 years of contributing that I needed to keep better records just in case.

With questions like that the answer is unfortunately we don't know. They don't publish guidelines for things like this so the best answer is if you tell the IRS something be prepared to defend it. Unless there is case law you can point to, it's hard to say what they will and won't accept.

Seems crazy that a brokerage would not clearly and with legal proof keep track of contributions that make their Roth IRA product painless

It gets tricky when you move it around and then roll in Roth money from an old Roth 401k. I never plan to make a withdrawal before 59.5 so I am not that worried about it.