I was not tracking my Roth IRA basis since I started my Roth IRA in 2011. I didn't see the point, other than the rare case where I'd need to withdraw funds early.
I'm still young (46) and not planning on withdrawing Roth IRA funds any time soon (referring to the 5 years thing), but the way things are going in this country, perhaps I should consider the potential need, in which case I understand that withdrawing before 59-1/2 has implications.
As I understand it, I can withdraw CONTRIBUTIONS tax-free before 59-1/2, but not earnings, thus the importance of tracking the basis. In that situation, I imagine the IRS governance looking something like this - asking for someone to please confirm:
- Background: I've never elected to allow TurboTax to track my basis, or if I did, I think I was entering $0, which is incorrect, because I contributed in 3 ways in the past: 1) in the early days when I was allowed to, I made a few small direct contributions; 2) as my income went over the limit, I converted my non-deductible traditional IRA to Roth (and paid the taxes on the earnings upon conversion); 3) in more recent years, I've done a few backdoor Traditional to Roth conversions, where the initial Traditional contribution was made as non-deductible.
- Hypothetically let's say I have a $500k balance in Roth IRA and I want to withdraw what I can (the basis, or contributions), tax-free, at age 50. Let's say that amount is $250k.
- I'd get a 1099-R for the tax year that I withdrew, and I'd indicate "not taxable" on my return, since I'd only be withdrawing my contributions, and not the earnings.
- IRS Governance: I suppose that first of all, it's a non-issue until I get audited, but let's say I get audited and they ask me to prove that the $250k I want to withdraw represents only my basis - my contributions over the years, and not the earnigs, which I'd withdraw tax-free after age 59-1/2.
- What qualifies in the IRS's eyes as proof in that scenario? I can't imagine that it makes a bit of difference if I use TurboTax alone to track my Roth basis. For all intents and purposes, that tracking is just a more convenient scratch pad or notebook. My institution (Vanguard) only has the last 7 years of tax forms available on the website, and I had a hard drive crash years ago that caused me to lose records for 2016 and earlier (but maybe Vanguard can somehow dig those up for a fee or something?).
One last question. I had written myself a note (started keeping meticulous tax notes on OneNote years ago) that: "The contributed amount does not include funds converted from traditional IRA accounts. (This is saying do not include funds that went into Roth IRA as a result of backdoor conversion)".
Is the above comment in quotes actually true? I don't believe it is.
Thanks
