Handling of Roth Basis distributions across multiple Roth accounts in the same year.

[cpassman1959]

Hello.  I have multiple Roth IRA accounts.  I do this for ease of tracking the 5 year rule on taxable growth in Roth accounts.  Let's call them Roth-2022, Roth-2023, and Roth-2024.  All opened after I reached 60 years old and each created from a $50k conversion from my Traditional IRA in January of each year.  

During 2024, I pulled out $12k basis from Roth-2022 and pulled out $19 basis from Roth-2023 - totaling $41k. 

For tax year 2024, I received a 1099-R for Roth-2022 and a 1099-R for Roth-2023.  Both were input into TT-2024 manually (not via import).

Here is the problem ... when looking at the final tax return produced by TT2024, and the embedded IRA Information Worksheet, specifically line 55 "2022 conversion contributions taxable at conversion" I see only $9k in basis left, which tells me that TT applied **ALL OF THE BASIS WITHDRAWALS** to only Roth-2022.  I know this also because line 57 "2023 conversion contributions taxable at conversion" reflects its entire initial basis of $50k.

***This appears to be a bug in TT in that it doesn't differentiate when basis withdrawals are made in same year across two separate Roth accounts***

THEORY: It is interesting that when inputting the 1099-R for each Roth (with a basis withdrawal) into TT, the system does NOT collect the account number.  So, perhaps in current design it cannot correctly handle this scenario of separate basis withdrawals across two separate Roth accounts in the same tax year?

[bosso3]

Hello,

I don't know an answer to your question.  I am writing with a suggestion.

Withdrawing early from a Roth IRA can involve a 10% tax penalty on the amount withdrawn.

If you expect to need the money before 5 years, you may be better off not using a Roth IRA.

For Roth IRA details you can refer to IRS Publication 590b

https://www.irs.gov/publications/p590b

The section on Roth IRAs begins a little above half way down the document.

Additionally, IRS Publication 590b describes the order the money in an account is considered to be withdrawn.

[cpassman1959]

Hey there, first thank you for responding even if with just a suggestion 🙂

Actually, that is not correct. The basis of a Roth conversion (the amount you converted from a traditional IRA or other similar pretax account) can literally be withdrawn fed tax free a minute after you make the conversion. Because the Roth conversion from a traditional IRA is immediately a FIT taxable event. so the basis has already been taxed, you can pull it out later at any time with no fed tax.

The five-year rule that you mentioned is related to growth in the Roth account.  The conversion is considered taxable income, but any later distribution of the basis amount is not taxable income.

this is probably one of the most widely misunderstood considerations of Roth basis.  Five-year rule only applies to growth, and by the way there is a separate five year clock for each year conversions are made, that’s why I maintain separate Roth accounts that contain conversions made in different years, which have their own five year clock.

ps there are other complications if you are younger than 59.5, but that is not the case in my situation.

but again I do appreciate that you took the time to respond and make a suggestion.

Cheers!

[Matthew_JS]

The IRS does lump all Roth IRAs together and treat them as a single account for the purpose of withdrawal ordering rules. You cannot choose to withdraw only from a specific account; all your Roth IRAs are aggregated. 

The IRS mandates a specific order in which funds are considered to be withdrawn, which applies across all your Roth IRA accounts: 

1. Direct Contributions: Your own direct contributions to any Roth IRA are always considered to come out first. These can be withdrawn at any time, tax-free and penalty-free.
2. Conversions and Rollovers: Next come amounts from conversions and rollovers (such as from a traditional 401(k) or IRA). These are tracked as separate "pots" or layers, each potentially subject to its own 5-year clock for penalty-free withdrawal of the principal amount.
3. Earnings: Finally, earnings on all contributions and conversions are considered to be withdrawn. Earnings are tax-free and penalty-free only if the distribution is a "qualified distribution" (generally after age 59½ and after the main 5-year earnings-tracking rule is met). 

Even if you maintain separate physical accounts to simplify record-keeping for your own tracking purposes (which is a common strategy), the IRS views the money across all accounts as one pool and the mandated withdrawal order must be followed for tax reporting. 

[Opus 17]

IRA means individual retirement arrangement.  You have one arrangement, no matter how many accounts it is split into.  You do not need to track the basis separately, just note the total amount of contributions made to any Roth IRA.  

In your case, you have made $150,000 of conversions, that is your conversion basis.  You apparently have no contribution basis.  If you withdrew $41K, your remaining conversion basis is $109K.  

Turbotax should track that correctly, maybe you confused the program by trying to keep the account separate.  In any case, if you are audited, you need your own accurate records of your conversions (form 5498, probably)--nothing you entered in Turbotax will be convincing to the IRS since you could type anything into the program that you wanted to, even if it was not true.