IRA basis records

[kch130]

Regarding IRA contributions I have the following types spanning 1990 to 2020:

1. Traditional converted to Roth
2. Roth
3. Roth recharacterized as Traditional when I found I exceeded limits
4. Traditional, non-deductible
5. Roth conversion

Problem is that money has been moved from one firm to another (eg. American Century to Vanguard) and some older tax returns were destroyed. As a young man, I asked about keeping track of the money sources and was told not to worry about it, but now I think I'm a bind not having the paperwork to document the genealogy of each year's contributions. I assume this will be a problem and I could end up paying tax on money that should have been exempt?

I'm sure I'm not the first one down this road, what do y'all suggest?

 

[cathy63]

Yes, you have a problem. It's your responsibility to track your IRA basis, because the custodian has no way to know what portion of the contributions you took a tax deduction for and what portion were after tax. They can tell you how much you contributed in each year for which they still have records, but they can't tell you if you've already paid tax on any of it.

How do you do your taxes? Every time you file form 8606, it's cumulative, so if you can find even one return where you've filed it, that might have enough info for you going forward. If you have consistently used the same tax software, the numbers should also be stored there for you.

1. Traditional converted to Roth -- how did you figure out how much tax to pay on these conversions?
2. Roth -- tax was already paid on these, no tax due when withdrawing, so no problem
3. Roth recharacterized as Traditional when I found I exceeded limits -- I think you've already paid tax on these recharacterizations. If you exceeded the limits for the Roth contribution and also had a 401K in those years, so these are part of your tIRA basis.
4. Traditional, non-deductible -- you need to figure these out
5. Roth conversion -- same as #1

 

[ERD50]

What cathy63 said, but I'll add a combination "tax tip" and "rant". It won't really help you, but it might help others along the way.

I have a note in my tax file that says if I do not do anything to generate an 8606 that year, to make copies of the one from last years file, and add them to this years file. That way, each year has current information.

My rant is, we hear about how you should keep your tax forms for X years, but things like the 8606 could go back far longer, and if you lose it how the heck do you recreate it, or even know it existed? Stuff like that should be carried forward in some official way.

-ERD50

 

[Gumby]

I have not had to file Form 8606 for about 20 years, but I am about to start Roth conversions, so I need to know the basis. Fortunately, I have saved a copy of every tax return since 1977, so I was able to find my last 8606 and copy it.

 

[Sunset]

In terms of basis, it's not the stock basis value that is of concern.

It is the non-deductible contribution amount in the IRA that is needed to know.
If a person never had non-deductible contribution to their IRA, then there are no issues.

As an aside, I think this entire issue is annoyingly stupid the way the IRS forces us to deal with it. However, if a person uses tax software year to year, the value remaining will be carried forward and the "pain in the ___" part is largely gone.

 

[COcheesehead]

Another good reason to do your own taxes in TurboTax. It will track the basis for you.

 

[oldphd]

Roth contributions...

You may also want to track Roth contributions...

For example, let's say you're a very kind parent who puts Roth contributions in for your kids when they start making a little money at 18 or whatever, are in college, and don't have much income tax to pay.

You might also be a pack rat who keeps every tax return and end of year financial statement to know this info.

Then, one glorious day, you quit working and relocate after too many years in one place, and pitch lots of stuff!!!

Next thing you know, said kid is in his mid 30s and exploring FI and RE for down the road, say 50. He starts to ask questions about taking out the Roth contributions for the years prior to 59 1/2. He finds out that said financial firm doesn't keep records of contributions going back that long, so the exact amounts can't be proven, though most likely a good guesstimate. If you had kept those financial statements you'd have that info.

Don't ask me how I came up with this scenario...

 

[pb4uski]

I've been careful to keep my tIRA as all deductible contributions and obviously my Roth is all after-tax money so any tIRA withdrawals are taxable and any Roth withdrawals are tax-free.

 

[Montecfo]

I've been careful to keep my tIRA as all deductible contributions and obviously my Roth is all after-tax money so any tIRA withdrawals are taxable and any Roth withdrawals are tax-free.

I have done the same. Perhaps accordingly, I am a bit puzzled by some of the questions.

To the OP: are you saying all of these different types of IRAs were commingled? If so, you truly do have a mess. All you can do is estimate.

Otherwise:

To me a traditional IRA is unambiguous: withdrawals are taxable. Your basis is zero.

A Roth is tax free. Again, there is no concept of basis UNLESS you want to pull out contributions separately from earnings. If I wished to do this and had your facts, I would simply estimate the contributions.

The deductible IRAs are a puzzle. Again, I would estimate the contributions and do the math.

Recharacterized? Again. Same rules. It has no basis if it is a traditional IRA, and is tax free if it is Roth, regardless of how it got that way.

If you are taking about transactions done this year, you should be able to rebuild the facts from broker statements and 1099s.

Unless I am missing something it does not seem all that complicated.

 

[cathy63]

I have done the same. Perhaps accordingly, I am a bit puzzled by some of the questions.

To the OP: are you saying all of these different types of IRAs were commingled? If so, you truly do have a mess. All you can do is estimate.

Otherwise:

To me a traditional IRA is unambiguous: withdrawals are taxable. Your basis is zero.

A Roth is tax free. Again, there is no concept of basis UNLESS you want to pull out contributions separately from earnings. If I wished to do this and had your facts, I would simply estimate the contributions.

The deductible IRAs are a puzzle. Again, I would estimate the contributions and do the math.

Recharacterized? Again. Same rules. It has no basis if it is a traditional IRA, and is tax free if it is Roth, regardless of how it got that way.

If you are taking about transactions done this year, you should be able to rebuild the facts from broker statements and 1099s.

Unless I am missing something it does not seem all that complicated.

Back before there was such a thing as Roth IRA, when 401(k) contribution limits were still very low and pensions had disappeared, it wasn't all that unusual to make non-deductible contributions to a tIRA as a way to get some more of your savings to grow tax deferred. Then if you also rolled over your 401(k)s as you moved from employer to employer, either to get money out of high expense plans or just to consolidate it at a single broker, you ended up with tIRAs that had a mix of pre-tax contributions, after-tax contributions, and pre-tax earnings.

I've been keeping a spreadsheet since 1995 mainly to track the basis in our tIRAs, but I also have tabs for the Roths and HSAs just for completeness. Every year I add a new row with the transfers, withdrawals and balances for each account, print it out, and stick it in the folder with the copies of the tax returns. That way it's there even when we don't have to file an 8606. Looking at my notes on the tIRAs, I see we have non-deductible contributions, recharacterizations in a year when we unexpectedly exceeded the income allowed for Roth contributions, 401(k) rollovers, removal of excess 401(k) contributions noticed by the employer after a rollover, and Roth conversions from accounts with a basis. So we have all the same things kch130 has, plus a couple more. It's not hard to track the basis if you do it consistently, but if you didn't know you needed to, it can be tough to go back and recreate the data.

 

[pb4uski]

.... I've been keeping a spreadsheet since 1995 mainly to track the basis in our tIRAs, but I also have tabs for the Roths and HSAs just for completeness. Every year I add a new row with the transfers, withdrawals and balances for each account, print it out, and stick it in the folder with the copies of the tax returns. That way it's there even when we don't have to file an 8606. Looking at my notes on the tIRAs, I see we have non-deductible contributions, recharacterizations in a year when we unexpectedly exceeded the income allowed for Roth contributions, 401(k) rollovers, removal of excess 401(k) contributions noticed by the employer after a rollover, and Roth conversions from accounts with a basis. So we have all the same things kch130 has, plus a couple more. It's not hard to track the basis if you do it consistently, but if you didn't know you needed to, it can be tough to go back and recreate the data.

I remember making a conscious decision that I didn't want to track basis like this way back when which is why I made a conscious decision to only do deductible IRA contributions and to make any non-deductible IRA contributions.

 

[ERD50]

Another good reason to do your own taxes in TurboTax. It will track the basis for you.

In 1977, like some of the examples here? We are talking about tracking this stuff back decades, when it would have been generated.

The tax forms back then should have instructed us all to enter the previous year 8606 values into the current year filing (or at least to keep a copy with the current year paperwork). I don't know how advanced the IRS computers were in 1977, but they probably could check that if there was an 8606 entry last year there should be one this year, or at least spot check (human or computer). And at least we would have a current paper trail.

-ERD50

 

[kaneohe]

I have a folder called "Current Yr Taxes". In it is a single piece of paper that tracks the basis at start of each yr, basis used, and basis remaining. That single piece of paper has both my info and that of DW. It's easier when you are taking RMDs since you have to withdraw every yr and file the 8606.

 

[kaneohe]

I have done the same. Perhaps accordingly, I am a bit puzzled by some of the questions.

To the OP: are you saying all of these different types of IRAs were commingled? If so, you truly do have a mess. All you can do is estimate.

Otherwise:

To me a traditional IRA is unambiguous: withdrawals are taxable. Your basis is zero.

A Roth is tax free. Again, there is no concept of basis UNLESS you want to pull out contributions separately from earnings. If I wished to do this and had your facts, I would simply estimate the contributions.

The deductible IRAs are a puzzle. Again, I would estimate the contributions and do the math.

Recharacterized? Again. Same rules. It has no basis if it is a traditional IRA, and is tax free if it is Roth, regardless of how it got that way.

If you are taking about transactions done this year, you should be able to rebuild the facts from broker statements and 1099s.

Unless I am missing something it does not seem all that complicated.

You have basis in TIRA if you made non-deductible contribution. If you recharacterized a Roth to TIRA because you were not eligible for a Roth, then your TIRA will be non-deductible.

 

[Montecfo]

Back before there was such a thing as Roth IRA, when 401(k) contribution limits were still very low and pensions had disappeared, it wasn't all that unusual to make non-deductible contributions to a tIRA as a way to get some more of your savings to grow tax deferred. Then if you also rolled over your 401(k)s as you moved from employer to employer, either to get money out of high expense plans or just to consolidate it at a single broker, you ended up with tIRAs that had a mix of pre-tax contributions, after-tax contributions, and pre-tax earnings.

Right. And in that case you need records or failing that, an estimate of your nondeductible contributions.

I've been keeping a spreadsheet since 1995 mainly to track the basis in our tIRAs, but I also have tabs for the Roths and HSAs just for completeness.
Every year I add a new row with the transfers, withdrawals and balances for each account, print it out, and stick it in the folder with the copies of the tax returns. That way it's there even when we don't have to file an 8606. Looking at my notes on the tIRAs, I see we have non-deductible contributions, recharacterizations in a year when we unexpectedly exceeded the income allowed for Roth contributions, 401(k) rollovers, removal of excess 401(k) contributions noticed by the employer after a rollover, and Roth conversions from accounts with a basis. So we have all the same things kch130 has, plus a couple more. It's not hard to track the basis if you do it consistently, but if you didn't know you needed to, it can be tough to go back and recreate the data.

When you say "transfers" what are you referring to? Do you mean to consolidate accounts? Or contributions to the account?

And what do you mean by Roth conversions from accounts with a basis?

And when the employer removes excess 401k contribution in my experience you get a taxable distribution.

When you exceeded the Roth limits, wouldn't withdrawing the funds as allowed be a cleaner option?

I know you know this stuff. I am just trying to enhance my knowledge of it. I appreciate the indulgence.

 

[Bryan Barnfellow]

Here's another reason to keep good records of contributions, even for a Roth: I live in Switzerland, which treats both tIRA and Roths as taxable assets, once I begin to take distributions. BUT, Switzerland does not tax capital gains. So, when I report these distributions it is to my benefit to be able to show how much of the distribution is, in fact, a non taxable capital gain! Naturally, my US mutual fund/brokerage companies do not keep track of these things.

This may be true in other countries as well. So, best to think ahead if you are considering a move to another country in retirement.

 

[cathy63]

Right. And in that case you need records or failing that, an estimate of your nondeductible contributions.


When you say "transfers" what are you referring to? Do you mean to consolidate accounts? Or contributions to the account?

Yes, mostly for consolidation. Moving accounts to get as many as possible at a single brokerage and combining multiple tIRAs into one. At one point, between HSAs, ESPPs, ESOPs, 401(k)s, employer stock options, and our own savings we had 7 different brokerages to keep track of. We sold the last ESPP shares a couple of years ago and moved everything else that could be moved, so now we're down to 3.

And what do you mean by Roth conversions from accounts with a basis?

My tIRA has $X, which is about 8% of its current value, as after-tax contributions and a Roth recharacterization. That's its basis. If I do a Roth conversion of $100K this year, then I only have to pay income tax on $92K of that amount and my basis is reduced by $8K. (Of course you do this calc based on the value of the account on 12/31, so it's 8% today, but it could be a different percentage by then.)

And when the employer removes excess 401k contribution in my experience you get a taxable distribution.

In this case, I left the company in January 2012 and rolled over my 401(k) almost immediately. A couple of months later I got a letter from the former employer that said as a result of nondiscrimination testing conducted after the end of the plan year my contributions for 2011 had been limited to about $3K less than I had put in, and I was responsible for removing those excess funds from the rolled over amount. I talked to my broker, and they transferred the $3K to my taxable account and issued me two 1099s for 2012, one for the rollover and one for the withdrawal. I stuck both numbers in my spreadsheet and made a note on what had happened so I would remember enough to be able to explain it to the IRS if they cared to ask why I hadn't paid an early withdrawal penalty on that $3K. They never asked.

When you exceeded the Roth limits, wouldn't withdrawing the funds as allowed be a cleaner option?

The goal was to get more money growing tax deferred, and I already had a tIRA with a basis so adding a little more to it didn't make things any more messy than they already were. Given the situation and the available information, I don't think it was a bad decision. I might do something different today now that Roth Conversions are allowed, but that wasn't an option before 2010.

I know you know this stuff. I am just trying to enhance my knowledge of it. I appreciate the indulgence.

No problem. I only know about this stuff because we've had to deal with it over the years as the rules changed multiple times while we were navigating our way to retirement.

 

[Montecfo]

Cathy63, thanks so much for the explanation!

I did most of my consolidation within a single tax year, although what I assume to be the "final" piece had to wait until FIRE: rolling my last 401k into my rollover IRA.

When I cleaned out a bunch of my old records a few years ago, I built spreadsheets showing all the sources of funds for each tax favored account. I have referred to these "retirement account pedigrees" a few times since to remind myself "whatever happened to DW's 403b from XYZ 30 years ago?", for example, who was the custodian, etc.

There will be more fun recordkeeping come RMD time.

 

[gauss]

#1) Remember that you can get, for free, the last 10 years of 1099-R's and 5498s that were reported by your IRA custodian to the IRS directly from the IRS via a "Wage and Income" transacript. If you have a login with the IRS established you should be able to get them instantly -- other wise you can mail in the forms in get them in about a month or so. This saved my bacon when I realized the onerous recording keeping requirements for Roth IRAs if one wants to keep the option open of withdrawing contributions and conversions penalty and tax free before age 59 1/2. These 5498s would show your contributions to traditional and Roth IRAs each year (and rollover and conversions). The only part missing would be the amount of any IRA deduction/adjustment that you took on page 1 of 1040 that should not be included in your basis.



#2) Related to #1 if you can avoid taking any distributions from your Roth IRA until you are age 59 1/2 (and you opened your first Roth IRA at least 5 years ago) then this will be a non-issue as your Roth distributions will be qualified and no need to track basis in this.


#3) If you never filled out a form 8606 page 1 (where traditional IRA basis is tracked), then assuming a $0 basis for years 11 and prior may not be such a bad idea. Over a long term, the growth in your account will be mainly earnings dwarfing the contributions if you were invested in equities.


People ask me when they can throw out their tax records. I often say "when you die" if you want to minimize the chances of over paying on taxes down the road. They usually don't like my answer. To each their own.



-gauss

 

[sengsational]

Many years ago I went spelunking to unearth old 8606's. I agree that the filing process should generate a record so you don't need to do that digging. I made a spreadsheet then, and I update it every year, if the basis changes or not. Assuming zero basis might be ok for some people, but it's bad enough to pay income taxes once... I'm not going to pay them twice, if I can help it. I must admit, as I was digging in the cave for the ancient forms, I thought "why am I doing this...I could just make up a roughly accurate number and the IRS wouldn't know the difference", as it had been so long since I'd made a contribution that affected the basis. But the "it's possible to be accurate" aspect of me took over and I kept dusting through the layers until I had all the data.

 

[kch130]

So we have all the same things kch130 has, plus a couple more. It's not hard to track the basis if you do it consistently, but if you didn't know you needed to, it can be tough to go back and recreate the data.

Thank you cathy63, you understand. I'm going to re-read all of the kind responses and, with some documents being provided by my old CPA, I think I'll be able to navigate this mess.