How Do You Report Qualified Withdrawals from Roth Contribution Basis?

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Roth IRAs are amazing tax saving tools. Roth IRAs are a type of Individual Retirement Account that allow investors to grow their money tax-free. Even though there is no deduction for contributions, a Roth IRA provides the dual benefits of tax-free accumulation and tax-free distributions after age 59 1/2. The long-term benefits can be significant. There are also several distribution rules that make Roth IRAs great savings tools for early retirees.

At all times and at any age, you can withdraw as much as you have contributed to a Roth IRA without tax or penalty. However, knowing that you are able to do something and knowing how to tell the IRS what you did are two different things.

IRS Form 8606 Part III is called Distributions From Roth IRAs. This form is where you tell the IRS whether your withdrawal was qualified.

Unfortunately, in order to fill out the form properly the first time, you need to know your entire contribution history for any Roth IRA you’ve ever had.

While traditional IRA contributions and Roth conversions have a paper trail on your tax returns, Roth contributions are not reported on your return. In fact, the only IRS record would be on Form 5498.

Because you have until the filing deadline to contribute to your IRAs, custodians have until May 31st to send Form 5498. This also means that most tax payers don’t even take the time to save these seemingly superfluous forms in their tax records.

As a result, it very well might be possible that by the time you go to withdraw from your contribution basis you discover that you do not know what that basis is.

This is why the most effective strategy is to keep accurate records from the start. A simple document containing the tax year and amount contributed for each IRA owner is all that you need.

For example, if you contributed $6,000 for the first time in 2019 and again in 2020, your contribution basis would be $12,000, regardless of whether the account value itself were above or below this number.

If you have also done Roth conversions, then you will also need those years and totals summed up separately.

On Line 22 of Form 8606, you are instructed to “Enter your basis in Roth IRA contributions” and on Line 24 you are instructed to “Enter your basis in conversions from traditional, SEP, and SIMPLE IRAs and rollovers from qualified retirement plans to a Roth IRA.” If your basis from these two sources is larger than your distributions, then these two lines effectively offset any distributions you made.

In this way, to take advantage of tax-free penalty-free Roth withdrawals of contribution basis, you need to keep careful records of your Roth contributions.

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Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 700 financial articles. Her most popular post is "The Complete Guide to Your Washing Machine" while one of her favorites is "Funding a 3-Year-Old’s Roth IRA."