IRS asking about Roth IRA withdrawal

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SpaniardInChicago
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IRS asking about Roth IRA withdrawal

Post by SpaniardInChicago »

Hi.

So in 2021 I did a withdrawal of $18500 and I paid no taxes . Had this money in Betterment.
Since the money that I removed was all contributed more than 5,6 and 7 years ago respectively, I marked the 'dont pay taxes' during withdrawal.
I received a 1099R but didn't include it on my return because then I had to pay taxes (turbo tax didnt show me option to mark as exempt) even though I should be exempt of that.

So IRS is now asking about that, claiming I have to pay taxes on it.
How do I prove to the IRS that the money was contributed 5+ years ago?
Is there a specific form to do this?
mhalley
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Re: IRS asking about Roth IRA withdrawal

Post by mhalley »

Did you file form 8606?
From irs.gov
. Use Form 8606 to report:

Nondeductible contributions you made to traditional IRAs.
Distributions from traditional, SEP, or SIMPLE IRAs, if you have ever made nondeductible contributions to traditional IRAs.
Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs.
Distributions from Roth IRAs
https://www.irs.gov/pub/irs-pdf/f8606.pdf
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retiredjg
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Re: IRS asking about Roth IRA withdrawal

Post by retiredjg »

Depending on how you made your contributions, the withdrawal may not have been taxable. And it may have nothing to do with 5 years.

Even if your withdrawal is not taxable, you still have to show the withdrawal on your tax return and show the IRS why it was not taxable. This is done using Part III of Form 8606. Apparently you did not do that.

There is a worksheet for you to fill out - it is found in the instructions for Part III of form 8606. Then you will fill out Part III of Form 8606 (the 2021 version). It seems complex, but it is not too bad if you take it step by step.

All this starts by documenting (for yourself) how every dollar has every gotten into your Roth IRA. Until you can do that, you cannot fill out the form.
toddthebod
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Re: IRS asking about Roth IRA withdrawal

Post by toddthebod »

SpaniardInChicago wrote: Mon Jun 05, 2023 2:59 pm Hi.

So in 2021 I did a withdrawal of $18500 and I paid no taxes . Had this money in Betterment.
Since the money that I removed was all contributed more than 5,6 and 7 years ago respectively, I marked the 'dont pay taxes' during withdrawal.
I received a 1099R but didn't include it on my return because then I had to pay taxes (turbo tax didnt show me option to mark as exempt) even though I should be exempt of that.

So IRS is now asking about that, claiming I have to pay taxes on it.
How do I prove to the IRS that the money was contributed 5+ years ago?
Is there a specific form to do this?
Generally speaking, the IRS assumes things are taxable unless you tell them otherwise. In this case, it's by filing form 8606 as mentioned. Thankfully, proof is not required unless you get audited (in which case I hope you saved your 5498s).
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Duckie
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Re: IRS asking about Roth IRA withdrawal

Post by Duckie »

SpaniardInChicago wrote: Mon Jun 05, 2023 2:59 pm So in 2021 I did a withdrawal of $18500 and I paid no taxes . Had this money in Betterment.
Since the money that I removed was all contributed more than 5,6 and 7 years ago respectively, I marked the 'dont pay taxes' during withdrawal.
There is no five-year rule for withdrawing your contributions. As long as your total Roth IRA contributions were more than $18,500 you're covered.
I received a 1099R but didn't include it on my return because then I had to pay taxes (turbo tax didnt show me option to mark as exempt) even though I should be exempt of that.
You are required to include all 1099 forms on your return. You should have and the IRS caught that you didn't. What is on your 1099-R? I'm specifically concerned with boxes 1, 2a, 2b (anything checked?), and 7 (what code? J?).
So IRS is now asking about that, claiming I have to pay taxes on it.
How do I prove to the IRS that the money was contributed 5+ years ago?
Is there a specific form to do this?
Every year in May you receive Form 5498 from your IRA custodian if you contributed, converted, or withdrew. That form documents your Roth IRA contributions for the previous year. Those forms are the proof that the $18,500 withdrawal is from contributions, so not taxable. The IRS receives copies of that form.

Were you under age 59.5 at the time you withdrew? I assume so, but checking. If so, you need to fill out Part III of a 2021 Form 8606. Line 19 is for non-qualified distributions and if you were under age 59.5 the distributions are non-qualified. So put $18,500 on line 19. Line 22 is for your contribution basis, how much you contributed minus any previous withdrawals. If line 22 is more than line 19 you will have -0- on line 23. Take a good read of the 2021 instructions for Form 8606. Part III starts on page 9.
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Artsdoctor
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Re: IRS asking about Roth IRA withdrawal

Post by Artsdoctor »

Spaniard,

Duckie's explanation above is excellent. The biggest issue everyone should be aware of is:

If you receive a 1099-R from your broker, so did the IRS. The IRS is going to want figures to match and if you don't acknowledge any 1099-R figures, the IRS will most likely ask for an explanation.

There are many times when you get a tax document which does not result in a tax, such as when you rollover your 401k to an IRA. But you're going to have to report it on your return.
CuriousGeorgeTx
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Re: IRS asking about Roth IRA withdrawal

Post by CuriousGeorgeTx »

SpaniardInChicago wrote: Mon Jun 05, 2023 2:59 pm I received a 1099R but didn't include it on my return because then I had to pay taxes (turbo tax didnt show me option to mark as exempt) even though I should be exempt of that.
I wonder if your primary problem is a TurboTax problem. While I haven’t withdrawn anything from my Roth IRA, I can say that in general the TurboTax interviews for IRA-related transactions can be a little counterintuitive. If you are using the desktop (not online) version, you can switch to Forms mode and enter the information directly on the forms. (Some times I find after I do that, I can go back through the interviews and see how I could have answered some non-obvious questions to get to where I could enter the information in the interview.).

If you have consistently entered your contributions each year in TT, it will populate the forms with that data. If you haven’t, you will need to catch up.

The good news is that if, as it appears is the case here, you have contributed at least a much as you withdrew, there should be no tax liability, which you can demonstrate by filling out the forms that others have mentioned.

Good luck! It is always unsettling to hear from the IRS, but your story should have a happy ending.
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GMCZ71
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Re: IRS asking about Roth IRA withdrawal

Post by GMCZ71 »

SpaniardInChicago » Sat Mar 06, 2021 2:05 pm

33yo, 100% stocks.
You owe the tax and penalty.

Edit: Yes as Jedi posted you owe tax on earnings above the contribution amount.
Last edited by GMCZ71 on Tue Jun 06, 2023 8:12 am, edited 1 time in total.
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MrJedi
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Re: IRS asking about Roth IRA withdrawal

Post by MrJedi »

GMCZ71 wrote: Tue Jun 06, 2023 7:20 am
SpaniardInChicago » Sat Mar 06, 2021 2:05 pm

33yo, 100% stocks.
You owe the tax and penalty.
Not enough details to determine this. It depends on how much basis there is.
Topic Author
SpaniardInChicago
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Re: IRS asking about Roth IRA withdrawal

Post by SpaniardInChicago »

You guys are completely right, my contributions are tax free and penalty free.
I have proof of all the contributions I made:
2014 - $5500
2015 - $5500
2016 - $1500
2017 - $5500
2018 - $5500
2019 - $6000

So I could just state that the withdrawal was from those funds with form 8606.
I know for a fact that I added the 5498 forms every year I contributed. Do I have to resend them with my response to IRS along with form 8606?

Thanks so much for the explanations
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retiredjg
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Re: IRS asking about Roth IRA withdrawal

Post by retiredjg »

SpaniardInChicago wrote: Tue Jun 06, 2023 10:03 am You guys are completely right, my contributions are tax free and penalty free.
I have proof of all the contributions I made:
2014 - $5500
2015 - $5500
2016 - $1500
2017 - $5500
2018 - $5500
2019 - $6000

So I could just state that the withdrawal was from those funds with form 8606.
I know for a fact that I added the 5498 forms every year I contributed. Do I have to resend them with my response to IRS along with form 8606?

Thanks so much for the explanations
Your contributions are only tax free and penalty free if you made direct contributions. It could be different if you used backdoor Roth and/or Roth conversions.

Can you clarify?
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retiredjg
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Re: IRS asking about Roth IRA withdrawal

Post by retiredjg »

SpaniardInChicago wrote: Tue Jun 06, 2023 10:03 am So I could just state that the withdrawal was from those funds with form 8606.
I know for a fact that I added the 5498 forms every year I contributed. Do I have to resend them with my response to IRS along with form 8606?

Thanks so much for the explanations
You cannot just state what you think. You have to fill out the 2021 8606 form (part III only) and show them. Yes, you can send the 5498 forms if you want, but they already have them.

Do keep this 8606 for the future, because it will affect future withdrawals if you make any.
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SpaniardInChicago
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Re: IRS asking about Roth IRA withdrawal

Post by SpaniardInChicago »

I did direct contributions. Didn't do any conversions or backdoor.
Will then fill 2021 form 8606 part III and report this

Thank you again
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Artsdoctor
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Re: IRS asking about Roth IRA withdrawal

Post by Artsdoctor »

I didn't see that the OP verified he was under 59-1/2 at the time of the Roth distribution. If he was older than 59-1/2, then wouldn't he just have to enter the distribution amount on Form 1040, line 4a? Form 8606 is filed for non-qualified distributions on line 19, correct? If he was under 59-1/2, then he'd be obligated to file Form 8606.
Katietsu
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Re: IRS asking about Roth IRA withdrawal

Post by Katietsu »

I recommend that you keep a separate folder (physical or electronic) with all your Roth IRA 5498 and 1099-R forms. I would also keep a note that just lists all the contributions and distributions by year with a up to date number of the basis. The basis for your Roth is the total of your contributions minus your distributions as long as that is a positive number. Conversions add another level of complexity that should be documented as relevant. Turbotax desktop has an IRA worksheet to document all your past contributions, conversions and withdrawals.
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Duckie
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Re: IRS asking about Roth IRA withdrawal

Post by Duckie »

Artsdoctor wrote: Tue Jun 06, 2023 11:38 am I didn't see that the OP verified he was under 59-1/2 at the time of the Roth distribution. If he was older than 59-1/2, then wouldn't he just have to enter the distribution amount on Form 1040, line 4a?
If the OP was older than 59.5 in 2021 and had held a Roth IRA for more than five years then yes, the distribution would have been qualified with no taxes due and no Form 8606 necessary. If the Form 1099-R had a code of "Q" [Qualified distribution from a Roth IRA.] in box 7 then when included, the box 1 amount would have flowed to the 1040 line 4a. But I'm guessing the OP was not older than 59.5 and the 1099-R box 7 code was "J" [Early distribution from a Roth IRA, no known exception (in most cases, under age 59 1⁄2).].
Form 8606 is filed for non-qualified distributions on line 19, correct?
Correct.
If he was under 59-1/2, then he'd be obligated to file Form 8606.
Yes.
toddthebod
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Re: IRS asking about Roth IRA withdrawal

Post by toddthebod »

SpaniardInChicago wrote: Tue Jun 06, 2023 10:03 am I know for a fact that I added the 5498 forms every year I contributed. Do I have to resend them with my response to IRS along with form 8606?
You do not file your 5498 with your return. You get it from the brokerage and keep it for your records. In fact, brokerages do not issue your 5498 until after the filing deadline in the first place, as you are able to make prior year contributions until the tax filing deadline, and these need to be reflected on the 5498.
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Artsdoctor
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Re: IRS asking about Roth IRA withdrawal

Post by Artsdoctor »

Duckie wrote: Tue Jun 06, 2023 12:26 pm
Artsdoctor wrote: Tue Jun 06, 2023 11:38 am I didn't see that the OP verified he was under 59-1/2 at the time of the Roth distribution. If he was older than 59-1/2, then wouldn't he just have to enter the distribution amount on Form 1040, line 4a?
If the OP was older than 59.5 in 2021 and had held a Roth IRA for more than five years then yes, the distribution would have been qualified with no taxes due and no Form 8606 necessary. If the Form 1099-R had a code of "Q" [Qualified distribution from a Roth IRA.] in box 7 then when included, the box 1 amount would have flowed to the 1040 line 4a. But I'm guessing the OP was not older than 59.5 and the 1099-R box 7 code was "J" [Early distribution from a Roth IRA, no known exception (in most cases, under age 59 1⁄2).].
Form 8606 is filed for non-qualified distributions on line 19, correct?
Correct.
If he was under 59-1/2, then he'd be obligated to file Form 8606.
Yes.
Very helpful. Thank you for the confirmation.

Speaking of codes on a 1099-R, can you please clarify something which is uncertain to me?

I have a Roth at Vanguard which I opened many years ago. I'm over 59-1/2. It's clear to me that any distribution I take will be qualified.

I have a Roth at Fidelity which I opened last year because I have some tax-deferred accounts at Fidelity and I found it easier to do a conversion from a Fidelity account to another Fidelity account. If I were to take a distribution from that Fidelity next year, would it be a qualified distribution? The Roth at Fidelity is under 5 years old but I've had a Roth at another institution that was opened many years ago. Would this be a situation where my 1099-R from Fidelity would not list Q, that I'd use Form 8606 Part III to clarify, and that the distribution would ultimately be free of tax and penalty?
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Re: IRS asking about Roth IRA withdrawal

Post by Alan S. »

Artsdoctor wrote: Tue Jun 06, 2023 1:29 pm
Duckie wrote: Tue Jun 06, 2023 12:26 pm
Artsdoctor wrote: Tue Jun 06, 2023 11:38 am I didn't see that the OP verified he was under 59-1/2 at the time of the Roth distribution. If he was older than 59-1/2, then wouldn't he just have to enter the distribution amount on Form 1040, line 4a?
If the OP was older than 59.5 in 2021 and had held a Roth IRA for more than five years then yes, the distribution would have been qualified with no taxes due and no Form 8606 necessary. If the Form 1099-R had a code of "Q" [Qualified distribution from a Roth IRA.] in box 7 then when included, the box 1 amount would have flowed to the 1040 line 4a. But I'm guessing the OP was not older than 59.5 and the 1099-R box 7 code was "J" [Early distribution from a Roth IRA, no known exception (in most cases, under age 59 1⁄2).].
Form 8606 is filed for non-qualified distributions on line 19, correct?
Correct.
If he was under 59-1/2, then he'd be obligated to file Form 8606.
Yes.
Very helpful. Thank you for the confirmation.

Speaking of codes on a 1099-R, can you please clarify something which is uncertain to me?

I have a Roth at Vanguard which I opened many years ago. I'm over 59-1/2. It's clear to me that any distribution I take will be qualified.

I have a Roth at Fidelity which I opened last year because I have some tax-deferred accounts at Fidelity and I found it easier to do a conversion from a Fidelity account to another Fidelity account. If I were to take a distribution from that Fidelity next year, would it be a qualified distribution? The Roth at Fidelity is under 5 years old but I've had a Roth at another institution that was opened many years ago. Would this be a situation where my 1099-R from Fidelity would not list Q, that I'd use Form 8606 Part III to clarify, and that the distribution would ultimately be free of tax and penalty?
Once any of your Roth IRA accounts are qualified, all other Roth accounts are also qualified. As such, you should not report qualified distributions on Form 8606. They are shown only on line 4a of Form 1040.

Of course, Fido is not aware of your other Roth accounts. They know your age, but not if you have met the 5 year holding requirement. Therefore, they will code your Roth distribution with Code T. Nonetheless, you should not file Form 8606 according to the 8606 Inst., because your Roth is qualified. The IRS has your 5498 forms showing the years you made contributions and can access them if they are interested. There have been very few instances where the IRS ever inquires about Roth IRA tax reporting.
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Artsdoctor
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Re: IRS asking about Roth IRA withdrawal

Post by Artsdoctor »

^ Thank you. Very helpful.
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Duckie
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Re: IRS asking about Roth IRA withdrawal

Post by Duckie »

Artsdoctor wrote: Tue Jun 06, 2023 1:29 pm I have a Roth at Vanguard which I opened many years ago. I'm over 59-1/2. It's clear to me that any distribution I take will be qualified.

I have a Roth at Fidelity which I opened last year because I have some tax-deferred accounts at Fidelity and I found it easier to do a conversion from a Fidelity account to another Fidelity account. If I were to take a distribution from that Fidelity next year, would it be a qualified distribution? The Roth at Fidelity is under 5 years old but I've had a Roth at another institution that was opened many years ago. Would this be a situation where my 1099-R from Fidelity would not list Q, that I'd use Form 8606 Part III to clarify, and that the distribution would ultimately be free of tax and penalty?
As Alan S. mentioned, Fidelity would use code "T" [Roth IRA distribution, exception applies.], but if you're using tax-software you'll be asked: "Have you owned a Roth IRA for over five years?" Answering "Yes" will put -0- on Form 1040 line 4b.
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arcticpineapplecorp.
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Re: IRS asking about Roth IRA withdrawal

Post by arcticpineapplecorp. »

SpaniardInChicago wrote: Tue Jun 06, 2023 10:50 am I did direct contributions. Didn't do any conversions or backdoor.
Will then fill 2021 form 8606 part III and report this

Thank you again
what's the distribution code showing on line 7 of your 1099-R?
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Topic Author
SpaniardInChicago
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Re: IRS asking about Roth IRA withdrawal

Post by SpaniardInChicago »

arcticpineapplecorp. wrote: Tue Jun 06, 2023 8:42 pm
SpaniardInChicago wrote: Tue Jun 06, 2023 10:50 am I did direct contributions. Didn't do any conversions or backdoor.
Will then fill 2021 form 8606 part III and report this

Thank you again
what's the distribution code showing on line 7 of your 1099-R?
'J'
Betterment doesnt let me choose another option that relates to removal of contributions
toddthebod
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Re: IRS asking about Roth IRA withdrawal

Post by toddthebod »

SpaniardInChicago wrote: Thu Jun 08, 2023 9:38 am
arcticpineapplecorp. wrote: Tue Jun 06, 2023 8:42 pm
SpaniardInChicago wrote: Tue Jun 06, 2023 10:50 am I did direct contributions. Didn't do any conversions or backdoor.
Will then fill 2021 form 8606 part III and report this

Thank you again
what's the distribution code showing on line 7 of your 1099-R?
'J'
Betterment doesnt let me choose another option that relates to removal of contributions
What do you mean, "choose another option"?
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arcticpineapplecorp.
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Re: IRS asking about Roth IRA withdrawal

Post by arcticpineapplecorp. »

SpaniardInChicago wrote: Thu Jun 08, 2023 9:38 am
arcticpineapplecorp. wrote: Tue Jun 06, 2023 8:42 pm
SpaniardInChicago wrote: Tue Jun 06, 2023 10:50 am I did direct contributions. Didn't do any conversions or backdoor.
Will then fill 2021 form 8606 part III and report this

Thank you again
what's the distribution code showing on line 7 of your 1099-R?
'J'
Betterment doesnt let me choose another option that relates to removal of contributions
right but all J means is:
Code J indicates that there was an early distribution from a ROTH IRA. The amount may or may not be taxable depending on the amount distributed and the taxpayer's basis in ROTH IRA Contributions.
so if it's withdrawal of your contributions it's never taxable.

if it's withdrawal of your earnings it may be taxable depending upon your age and how long you've had the account.

If it's a combination of your earnings and contributions, see link above as well. Your 5498 shows your contributions to the Roth each year. First withdrawals are contributions, after those are used up, withdrawals are earnings on contributions.
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