If you don't track your IRA-related taxes, you could lose some of the tax benefits. For example, if you contribute after-tax dollars to a traditional IRA, you get to withdraw them tax-free in retirement -- but if you haven't kept appropriate records, all your withdrawals are taxed. If the IRS ever questions how much of your withdrawal is really after-tax money, you can settle the issue if you've kept the right IRA paperwork.
Form 8606 is a basic IRA record. You use it each year to report your nondeductible contributions to your IRA. If you make withdrawals, you also use 8606 to figure out how much of the withdrawal is after-tax money. If you convert part of a traditional IRA to a Roth IRA, you pay tax on the conversion, but not any after-tax dollars you convert. You figure out the tax-free part of the conversion on Form 8606.
If you own an IRA, expect Form 5498 from your account manager after the end of the year. The form reports contributions to your traditional IRA and your Roth, plus conversions, and contributions rolled over from other accounts. Because you always pay tax on Roth contributions, you can withdraw them at any time without tax. If the IRS ever disputes how much of your account is earnings and how much is contributions, the records on Form 5498 should settle it.
The IRS normally recommends that you keep tax records three years after you file your return. Unless the agency thinks you've under-reported income by 25 percent, or committed fraud, three years is the longest they can look back. IRA records are different, however, because tax issues can arise as long as the account is open, even with decades-old contributions. The agency recommends you keep the forms until you've completely cleaned out your account.
Every year that you take money out of your IRA -- whether in retirement, or earlier, in an emergency -- your account manager will send you a 1099-R recording the year's total withdrawals. The IRS recommends you hang on to this one too. The appendix to IRS Publication 590 includes a worksheet for you to keep track of contributions and distributions independently of the official tax forms. The law doesn't require you use it, but you may find it helpful.
- What Are the Benefits of a Roth IRA Vs. a Traditional IRA?
- Pros & Cons of Converting a Tradtional IRA to a Roth IRA
- Can I Convert an Employee Savings Plan to a Roth IRA?
- How to Change a Traditional IRA to a Roth
- Roth Vs. Traditional Vs. Rollover IRA
- What Do I Do With My IRA When I Quit My Job?
- Can IRA Contributions Be Reversed in the Same Year?
- How to Reduce Taxes on IRA Withdrawals