There's no law that says you have to keep track of your Roth IRA contributions. Not keeping records, though, can come back and bite you. You can take your basis -- your original contributions -- out of the account at any time, with no penalty as you've already paid tax on them. If you withdraw earnings as well, it's going to cost you.
If you've turned 59 1/2 and your Roth is at least five years old, all your withdrawals are tax-free "qualified distributions." If you don't meet those conditions, you can still take out your original contributions tax-free. If you withdraw, say, $5,000 in earnings as well, that's $5,000 in taxable income, plus a 10 percent early withdrawal penalty if you're under 59 1/2. If you convert a traditional IRA to a Roth, you pay the 10 percent tax if you withdraw that money before five years pass.
Contributions and Conversions
Unlike a traditional IRA, there's no tax write-off for Roth contributions. The good news is, the IRS doesn't require you report contributions. The downside is that unlike when you have a traditional IRA, you don't get a tax form summing up your Roth IRA contributions. You'll have to track your contributions or have your account manager send you a statement. If you convert another account to a Roth, you will get a Form 5498 from the account manager showing how much money you moved to the Roth. You report conversions to the IRS on Form 8606.
If you withdraw money from the account, you have more math to do. For example, if you've contributed $3,000 a year for the past six years and withdraw $4,500 this year, your basis is $18,000 minus $4,500 which equals $13,500. Fortunately, you receive a 1099-R form for any IRA withdrawals of $10 or more, and you report them on Form 8606. Keep your forms for each year filed away with your own records so you don't get lost in the numbers.
Normally, you only keep tax records for three years. That's as far as the IRS gets to look back in an audit, unless they suspect you of fraud, or of under-reporting your income by at least 25 percent. With an IRA, it's different. The IRS recommends that until you've emptied out the account and closed it, you keep the records on hand. Keep the records somewhere your beneficiary can find them, in case you die with money still in the account.
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- How to Calculate Excess IRA Contributions
- The Withdrawal of Excess Traditional IRA Contributions
- Can I Contribute to My IRA Annuity If I Already Contribute to a SIMPLE IRA?
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- Does Contributing to an IRA Affect Financial Aid?