Roth IRA Contributions Basis and Tax returns

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Topic Author
ImpossibleMonkey
Posts: 3
Joined: Sun Apr 18, 2021 1:59 pm

Roth IRA Contributions Basis and Tax returns

Post by ImpossibleMonkey »

Hello all,

I have joined the workforce a few years ago and contributed to a Roth IRA in 2 ways:

• Backdoor Roth: I was over the limit to contribute directly to a Roth IRA so I have been maxing out my Trad IRA each year and converting it right away to my Roth IRA

• My employer let me contribute after tax money to my 401K. I have have been doing a Mega Backdoor Roth (putting the after tax money in the 401K and doing an in-service distributions to my Roth IRA) up to the annual limit



I have been doing the above for 4-5 years. For the last 2 years I have been working with a very nice CPA. On my tax return I can see the amounts I have contributed via the Backdoor Roth and Mega Backdoor Roth. My CPA also adds a worksheet with the carry over from previous years (I can see the total of this year + total from last year etc)

My goal:

I am trying to figure out how much I have contributed as I need to withdraw all my Roth Contributions/Conversions (I'm sure what is the correct term here as I was doing conversions from Trad IRA and roll over from 401K). My understanding is that I would be able to withdraw this penalty free wherever

My goal is to find out the exact $ amount of my Roth contributions/conversions I can withdraw and that the IRS records (if they keep track of this) matches what I'll take out

Questions

• Does your total Roth contributions/conversions (whatever I was doing) appear somewhere on your last tax return? Or do you only see the contributions/conversions for the current year and the worksheet my CPA adds is just an optional extra?

• For the 2-3 years before working with my current CPA I am not sure my contributions/conversions where filed properly. Where should I check on my previous returns? If it was not filed properly would I need to amend all those previous tax years? How much work is it for a CPA / how much would they charge (does it make it more difficult that my CPA would nee to amend returns she had not filed herself)

Anything way of phrasing this would be does the IRS keeps tracks of your basis/knows about? Or I can withdraw what I can tax free and just provide the documentation (5498?) if audited?

• I was converting the money from the Trad IRA and the after tax 401K money right away meaning there was no barely any growth ( just a few cents). Could you confirm that the 5 year clock to be able to withdraw the Roth Contributions penalty free does not apply for the 2 kind of contributions/conversions I was making? (and only applies to the few cents of growth?)


PS: I do have all my 5498s. Is this what I should use to figure out the total of my contributions?

My only concern is that in 2017 I did something weird (emptied the Roth IRA mid year then contributed some after tax money until the end of the year) so I have a 5498 and 1099-R for that year but I'm not sure what is considered my total contributions for that year in the end. This looks like this https://imgur.com/a/TnhsmWJ
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FiveK
Posts: 15742
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth IRA Contributions Basis and Tax returns

Post by FiveK »

ImpossibleMonkey wrote: Sun Apr 18, 2021 2:11 pm Questions

1) Does your total Roth contributions/conversions (whatever I was doing) appear somewhere on your last tax return? Or do you only see the contributions/conversions for the current year and the worksheet my CPA adds is just an optional extra?

2) For the 2-3 years before working with my current CPA I am not sure my contributions/conversions where filed properly. Where should I check on my previous returns? If it was not filed properly would I need to amend all those previous tax years? How much work is it for a CPA / how much would they charge (does it make it more difficult that my CPA would nee to amend returns she had not filed herself)

Anything way of phrasing this would be does the IRS keeps tracks of your basis/knows about? Or I can withdraw what I can tax free and just provide the documentation (5498?) if audited?

3) I was converting the money from the Trad IRA and the after tax 401K money right away meaning there was no barely any growth ( just a few cents). Could you confirm that the 5 year clock to be able to withdraw the Roth Contributions penalty free does not apply for the 2 kind of contributions/conversions I was making? (and only applies to the few cents of growth?)


PS: I do have all my 5498s. Is this what I should use to figure out the total of my contributions?

My only concern is that in 2017 I did something weird (emptied the Roth IRA mid year then contributed some after tax money until the end of the year) so I have a 5498 and 1099-R for that year but I'm not sure what is considered my total contributions for that year in the end. This looks like this https://imgur.com/a/TnhsmWJ
1a. No
1b. You will see conversions and rollovers but not direct contributions.

2. What is it about the returns that makes you think they were not filed properly? The IRS gets copies of the 5498s.

3. See the Treatment of distributions chart. Note that each conversion has its own five year clock.

The 5498s will have the total of various incoming amounts. For purposes of Form 8606, where you document Roth IRA distributions, you have to subtract any previous distributions. See the instructions. Of course, if the instructions are unclear, re-ask specifics. ;)
Alan S.
Posts: 12669
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Roth IRA Contributions Basis and Tax returns

Post by Alan S. »

ImpossibleMonkey wrote: Sun Apr 18, 2021 2:11 pm

I have been doing the above for 4-5 years. For the last 2 years I have been working with a very nice CPA. On my tax return I can see the amounts I have contributed via the Backdoor Roth and Mega Backdoor Roth. My CPA also adds a worksheet with the carry over from previous years (I can see the total of this year + total from last year etc)

The worksheets are produced by the tax program, so it is very easy to provide you a copy. The accuracy depends on you providing the CPA with all your contribution data every year, even regular Roth contributions that are not reported on the return. The CPA enters this (or should) and the program captures and updates your Roth IRA contribution basis which makes it easy to report any distributions you take, as what happened in 2017.

Challenges to the cumulative basis accounting occur if the CPA changes tax programs, or you change accounting firms, or state to file your own returns. Just one year of lost data will cause errors if the data is not somehow reconstructed. Retaining 5498 forms helps, but you also need to incorporate distributions (shown on tax return), any recharacterizations, or removal of excess contributions.


My goal:

I am trying to figure out how much I have contributed as I need to withdraw all my Roth Contributions/Conversions (I'm sure what is the correct term here as I was doing conversions from Trad IRA and roll over from 401K). My understanding is that I would be able to withdraw this penalty free wherever

Yes, as long as the earnings on your back door and mega back door conversion are only pennies, there is no penalty because the penalty only applies to the taxable portion of your conversions. They appear on lines 4b and 5b of Form 1040 each year.

My goal is to find out the exact $ amount of my Roth contributions/conversions I can withdraw and that the IRS records (if they keep track of this) matches what I'll take out

Check the worksheets you have been provided. Do they appear accurate and match up with your 5498 forms?

Questions

• Does your total Roth contributions/conversions (whatever I was doing) appear somewhere on your last tax return? Or do you only see the contributions/conversions for the current year and the worksheet my CPA adds is just an optional extra?

Regular Roth contributions do not show on your return, but should on the worksheets. Conversions do show on your return as part of lines 4a and 5a (taxable amounts on 4b and 5b). Distributions show on Form 8606. It would be interesting to check your 8606 for 2017 for line 22 to see if makes sense and if the worksheets were updated for the distribution you took.
NOTE: The tax return lines I provided are current line numbers, but those line numbers changed in 2018 and 2019.
For 2017 and earlier they were line 15 instead of 4, and 16 instead of 5.


• For the 2-3 years before working with my current CPA I am not sure my contributions/conversions where filed properly. Where should I check on my previous returns? If it was not filed properly would I need to amend all those previous tax years? How much work is it for a CPA / how much would they charge (does it make it more difficult that my CPA would nee to amend returns she had not filed herself)

You cannot amend returns older than 3 years in most cases. It would be expensive. You only took one distribution, right?

Anything way of phrasing this would be does the IRS keeps tracks of your basis/knows about? Or I can withdraw what I can tax free and just provide the documentation (5498?) if audited?

The IRS receives enough data to track Roth basis, but they do not use it. Who knows if the data is organized should they decide to utilize it. There is heavy anecdotal evidence of this. The IRS has been understaffed for a few years and hit with constant major tax legislation from Congress. Then Covid. Apparently, major budget increases are planned to improve enforcement and audits. I would not depend on the current mess as the IRS to last too much longer. Fact is, the custodians and tax programs used to file your returns are the current basic enforcement efforts, not the IRS.

• I was converting the money from the Trad IRA and the after tax 401K money right away meaning there was no barely any growth ( just a few cents). Could you confirm that the 5 year clock to be able to withdraw the Roth Contributions penalty free does not apply for the 2 kind of contributions/conversions I was making? (and only applies to the few cents of growth?)

Yes, confirmed.


PS: I do have all my 5498s. Is this what I should use to figure out the total of my contributions?

Good, you are in better shape than most. You can use these forms to cross check the worksheets, and to see if the worksheets captured data you may have provided prior to this CPA. Remember, a 5498 is effectively modified if there is a distribution, recharacterization, excess removal etc. These modifications should be shown on your tax return, sometimes as explanatory statements. All distributions including recharacterization transfers are reported on their own 1099R and matching 5498 in the case of recharacterizations or rollovers.

My only concern is that in 2017 I did something weird (emptied the Roth IRA mid year then contributed some after tax money until the end of the year) so I have a 5498 and 1099-R for that year but I'm not sure what is considered my total contributions for that year in the end. This looks like this https://imgur.com/a/TnhsmWJ


Your distribution reported on Form 8606, line 19 and uses up some of your line 22 basis, however your new regular contribution reported on Form 5498 adds back to the basis. As indicated, this should be reflected on the worksheets if the worksheet data is valid.
Topic Author
ImpossibleMonkey
Posts: 3
Joined: Sun Apr 18, 2021 1:59 pm

Re: Roth IRA Contributions Basis and Tax returns

Post by ImpossibleMonkey »

Thank you both for your replies, appreciate it!

It's a lot to digest and will need to dig into my previous tax returns and see what does it look like compared to my 5498s.

Will report back soon :)
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