Roth IRA question

My mistake. I mis named my 1099 from last year. It was my Roth conversion from the IRA. I didn't have a distribution last year. I called Schwab and the one I did this year was coded correctly.
 
Romer said:
My mistake. I mis named my 1099 from last year. It was my Roth conversion from the IRA. I didn't have a distribution last year. I called Schwab and the one I did this year was coded correctly.
Click to expand...

Glad you figured it out! I thought it must be something like that.
 
Each roll-over you do restarts the 5 year rule. Your financial institution should have made that clear. From investopedia.com:

Beware of the 5-Year Rule
One potential trap to be aware of is the so-called "five-year rule." You can withdraw regular Roth IRA contributions tax- and penalty-free at any time or any age. Converted funds, on the other hand, must remain in your Roth IRA for at least five years. Failure to abide by this rule will trigger an unwelcome 10% early withdrawal penalty.
9

The five-year period starts at the beginning of the calendar year that you did the conversion.
9
So, for example, if you converted traditional IRA funds to a Roth IRA in November 2022, your five-year clock would start ticking on Jan. 1, 2022, and you'd be able to withdraw money without penalty anytime after Jan. 1, 2027.

Remember, this rule applies to each conversion, so if you do one in 2023 and another in 2024, the latter transfer will need to be held in the account for a year longer to avoid paying a penalty.
 
Fishsticks007 said:
Each roll-over you do restarts the 5 year rule. Your financial institution should have made that clear. From investopedia.com:

Beware of the 5-Year Rule
One potential trap to be aware of is the so-called "five-year rule." You can withdraw regular Roth IRA contributions tax- and penalty-free at any time or any age. Converted funds, on the other hand, must remain in your Roth IRA for at least five years. Failure to abide by this rule will trigger an unwelcome 10% early withdrawal penalty.
9

The five-year period starts at the beginning of the calendar year that you did the conversion.
9
So, for example, if you converted traditional IRA funds to a Roth IRA in November 2022, your five-year clock would start ticking on Jan. 1, 2022, and you'd be able to withdraw money without penalty anytime after Jan. 1, 2027.

Remember, this rule applies to each conversion, so if you do one in 2023 and another in 2024, the latter transfer will need to be held in the account for a year longer to avoid paying a penalty.
Click to expand...

not correct as stated earlier
 
From Ed Slott Report at

https://www.irahelp.com/slottreport/five-year-rule-and-rmds-todays-slott-report-maibag

This is an area where we get many questions. There are two five-year rules that apply to Roth IRA distributions.

The first five-year rule applies to converted funds. If you are under 59 1/2, and you take a distribution of converted funds within five years of the conversion, a 10% penalty will apply. This five-year rule does not apply in your case because you are over age 65.

However, there is a second five-year rule that applies when there is a distribution of earnings, and that does apply to you. If your first Roth conversion or contribution was for 2020, you must wait until January 1, 2025 before you can access your earnings from your Roth IRA tax-free.
Click to expand...
 
I don't have a Roth but have a basic question:
As I understand it, you cannot touch the earnings for 5 years. If your investments are in funds or whatever, how do they know you are withdrawing the principal and not the income? I'd think you're likely reinvesting your income back into the fund, so how do they differentiate?

Or is this a matter of withdrawing more than the initial deposit?

Apologies if I'm just out in the weeds here.
 
marko said:
I don't have a Roth but have a basic question:
As I understand it, you cannot touch the earnings for 5 years. If your investments are in funds or whatever, how do they know you are withdrawing the principal and not the income? I'd think you're likely reinvesting your income back into the fund, so how do they differentiate?

Or is this a matter of withdrawing more than the initial deposit?

Apologies if I'm just out in the weeds here.
Click to expand...

I believe the assumption is that withdrawals are contributions first, earnings only after the contributions are exhausted. I'll look for a cite.

UPDATE:

The IRS has "Ordering Rules" for Roth distributions and they work as I thought. (i.e. contributions first). They are contained in this IRS publication https://www.irs.gov/publications/p590b#en_US_2022_publink100089915


Ordering Rules for Distributions

If you receive a distribution from your Roth IRA that isn't a qualified distribution, part of it may be taxable. There is a set order in which contributions (including conversion contributions and rollover contributions from qualified retirement plans) and earnings are considered to be distributed from your Roth IRA. For these purposes, disregard the withdrawal of excess contributions and the earnings on them (discussed under What if You Contribute Too Much? in chapter 2 of Pub. 590-A). Order the distributions as follows.

Regular contributions.

Conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first). See Aggregation (grouping and adding) rules, later. Take these conversion and rollover contributions into account as follows.
Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first.
Nontaxable portion.

Earnings on contributions.

Disregard rollover contributions from other Roth IRAs for this purpose.
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Last edited:
marko said:
I don't have a Roth but have a basic question:
As I understand it, you cannot touch the earnings for 5 years. If your investments are in funds or whatever, how do they know you are withdrawing the principal and not the income? I'd think you're likely reinvesting your income back into the fund, so how do they differentiate?

Or is this a matter of withdrawing more than the initial deposit?

Apologies if I'm just out in the weeds here.
Click to expand...


This was in an earlier post, from Ed Slott
I ran across a good discussion yesterday from Ed Slott yesterday. While I thought I understood the 5 year rule, he says it is actually 2 clocks. This cleared it up for me.
https://www.irahelp.com/slottreport/...ve-year-clocks
Says there are 2 clocks, first is to determine if you pay a 10% penalty for early withdraw. Since you are past the 59.5 your clear on this one.

Second click is to determine if you pay taxes on the withdraw. Since you have had a Roth IRA for over 5 years, any Roth, it would not be subject to taxes.
Click to expand...
This cleared up for me, hope it helps you.
:cool:
 
Your brokerage company (or bank) will give a 1099 to you each year and on there will show the basis. (the amount you put in) and that is how the IRS can tell if you took out over that.......if so then the penalty is computed.
 
Rjhasti said:
Your brokerage company (or bank) will give a 1099 to you each year and on there will show the basis. (the amount you put in) and that is how the IRS can tell if you took out over that.......if so then the penalty is computed.
Click to expand...

Thanks.
 
Rjhasti said:
Your brokerage company (or bank) will give a 1099 to you each year and on there will show the basis. (the amount you put in) and that is how the IRS can tell if you took out over that.......if so then the penalty is computed.
Click to expand...

1099s show distributions (i.e. withdrawals / conversions) from IRAs. The contributions are reported to the IRS on Form 5498s.

But the bottom line is the same - the IRS has all the information to tell how much you've put in cumulatively (via 5498s) and how much you've withdrawn (via 1099s).

And as Gumby mentions, the IRS rules deem that all contributions are withdrawn first, then conversions, then earnings, in that order, oldest years to newest years. And it's all done based on dollars in and dollars out; whatever happens within the IRA in terms of purchases, sales, dividends, interest, whatever is entirely black box and entirely irrelevant.

I don't think the IRS computers enforce the taxes / penalty, although they could in theory. I think the taxpayer themselves is expected to prepare their return properly - including the 1040 itself, and Forms 8606 and 5329 as appropriate.

Since it's a complicated area with lots of rules and recordkeeping requirements which are poorly understood by most taxpayers, I think many returns are prepared incorrectly where these areas are involved.
 
In 2024, I expect to withdraw $6,000 from my Roth IRA to pay expenses.
I will be age 53 and my Roth IRA was opened (and still is) with Vanguard in 2004. I contributed the maximum amounts allowed each year during the years from 2004 to 2012.
My question is about doing taxes for this expected distribution in Tax Year 2024 when I get tax forms from Vanguard in January 2025.
I meet the requirement of the 5-year rule since opening the Roth IRA, but not the over 59 1/2 years old rule.
So it's an early distribution but I'm withdrawing an amount that's meant to come from my past contributions (not earnings) since I have not taken any prior withdrawals from this account.
Does anyone know what the 1099-R distribution code should be or any other tax forms from Vanguard related to this Roth IRA distribution should show?
Thank you!
-just_hatched
 
just_hatched said:
In 2024, I expect to withdraw $6,000 from my Roth IRA to pay expenses.
I will be age 53 and my Roth IRA was opened (and still is) with Vanguard in 2004. I contributed the maximum amounts allowed each year during the years from 2004 to 2012.
My question is about doing taxes for this expected distribution in Tax Year 2024 when I get tax forms from Vanguard in January 2025.
I meet the requirement of the 5-year rule since opening the Roth IRA, but not the over 59 1/2 years old rule.
So it's an early distribution but I'm withdrawing an amount that's meant to come from my past contributions (not earnings) since I have not taken any prior withdrawals from this account.
Does anyone know what the 1099-R distribution code should be or any other tax forms from Vanguard related to this Roth IRA distribution should show?
Thank you!
-just_hatched
Click to expand...

You'll get a 1099-R from Vanguard in January 2025 with your distribution amount in box 1 and probably a distribution code in box 7 of J which is for an early distribution from a Roth IRA.

You'll need to complete Part III of Form 8606, which should sidestep the 10% EWP.
 
Thank you so much for the quick explanations! I simulated the Roth distribution using HR Block Tax Software for Tax Year 2023 and I used code J for the simulated 1099-R entry. After the program asked me a few more questions, it asked for my basis in Roth contributions that it entered on line 22 on form 8606.
Upon looking at my own Roth contribution records, it seems that younger me slipped in a 2003 Roth contribution as well, so I entered my total contributions for 2003-2012 as $43,000 and thus line 23 ends up at $0 in the simulation.

I suppose that
1. It's good that I had a record of my contributions (I don't know if that has completely been up to me or if Vanguard and the IRS have also been keeping track) and
2. It seems that I should keep track of the "basis in Roth contributions" going forward for any other potential distributions I take prior to age 59 1/2 as the basis will go down each time I take a distribution.
 
8606 was a PITA for me, but it's finally over (took the last bit out in 2021. Because you don't need to file a 8606 every year, it was a pain to keep track of what my basis was. Many years ago, I dug out all my old tax documents from the era when I had both deductible and non-deductible IRA contributions and constructed a spreadsheet. Once I had that, I force printed a 8606 every year, even though I didn't file it. That way, data was at hand just looking at the previous year's print outs .
 
just_hatched said:
I suppose that
1. It's good that I had a record of my contributions (I don't know if that has completely been up to me or if Vanguard and the IRS have also been keeping track) and
2. It seems that I should keep track of the "basis in Roth contributions" going forward for any other potential distributions I take prior to age 59 1/2 as the basis will go down each time I take a distribution.
Click to expand...

1. Vanguard will try to help you, but at the end of the day it's your responsibility. The Form 5498s that you received when you made those contributions say to save them as tax records, but most people don't understand why and therefore do not save them. I'm glad you were able to reconstruct your contributions.

2. Yup. You can do this by keeping your most recent 8606 and any 5498s. (It's also possible for your basis to go up, for example if you have Roth conversions that reach the five year mark.)
 
SecondCor521 said:
It's also possible for your basis to go up, for example if you have Roth conversions that reach the five year mark.
Click to expand...

Interesting that you point that out because I did a Traditional IRA to Roth IRA conversion in 2012 of $47,616. Luckily I found my record of that because I knew that I did a conversion back then but I would have never remembered a number like that. I've only done one conversion.

So I guess that means that if I need to fill out form 8606 a year from now, then I have two basis values:
1. $43,000 (contributions total) (the most important for now) and
2. $47,616 (conversion total) (later if needed before age 59 1/2)

It looks like form 8606 has line 22 for "basis in Roth contributions" and line 24 for "basis in conversions from traditional IRAs to a Roth."
There's a note on form 8606 between lines 22 and 24 that looks like the contributions portion is entered first and if the result is $0 for line 23, then skip the Conversions section. If, however, the distribution was more than the contributions basis, then calculate the Conversions basis.
 
Right. You'll use up your contribution basis first, then conversion basis next (if needed).
 
SecondCor521 said:
1. Vanguard will try to help you, but at the end of the day it's your responsibility. The Form 5498s that you received when you made those contributions say to save them as tax records, but most people don't understand why and therefore do not save them. I'm glad you were able to reconstruct your contributions.
Click to expand...

Note that up to 10 years of form 5498 and 1099 are available for free from the IRS. I downloaded my last 10 years of these once I realized how non-qualified (ie before age 59 1/2) Roth distributions are handled.

What you need to request is a "Wage and Income Transcript " for each year. A married couple will need to submit 2 requests (ie a separate one for each SSN).

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

Note if this is your first time doing this, and you want to get the last 10 years before the oldest one rolls off the end, then I would do a mail request if you don't have an active irs.gov account. Setting up the irs.gov account can be an onerous time consuming process that can be done later.

-gauss
 
^ good point, @gauss. I didn't think they went back 10 years, but that is nice to know.
 
I have an unusual situation that I’m having trouble applying the 5-year rules to. I recently rolled my 401K over to an IRA, but it contained a small amount of after-tax contributions (from a time before 401Ks were born..) that rolled to a newly created Roth account. I’m well past 59-1/2, so that part is covered, but although the account is technically new, it was funded by money committed in 1980. I believe I can access that money now, but what if I add to it with conversions? Will that “converted” money be tied up with penalties until the account is 5 years old? My Schwab contact says no, but it seems there are differences of opinion….
 
m3bs said:
I have an unusual situation that I’m having trouble applying the 5-year rules to. I recently rolled my 401K over to an IRA, but it contained a small amount of after-tax contributions (from a time before 401Ks were born..) that rolled to a newly created Roth account. I’m well past 59-1/2, so that part is covered, but although the account is technically new, it was funded by money committed in 1980. I believe I can access that money now, but what if I add to it with conversions? Will that “converted” money be tied up with penalties until the account is 5 years old? My Schwab contact says no, but it seems there are differences of opinion….
Click to expand...
If this is your first Roth IRA, the sequence of withdrawals is contributions & rollovers first, then when that bucket is empty you begin withdrawing from conversion amounts (oldest year to most recent year) until that bucket is empty, before you get to the Roth IRA earnings bucket. Being over 59.5 only the earnings bucket withdrawals will be taxed if the first Roth IRA is less than 5-tax years old. No penalties after 59.5, all conversion clocks became satisfied at 59.5 even if thess than 5-yrs has passed.
 
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