This is a hypothetical but will be helpful to learn how this might be handled, for a beginner like me.
Let's say I open an after-tax IRA and fund it with $10,000 of my own after-tax money. Or similarly, I buy $10,000 worth of stock with my own after-tax money.
After a a few weeks, I see the value is now $11,000. So I sell the stock and/or close the IRA.
They send me a disbursement of $11,000.
At tax time, I know they report that I received $11,000. I understand that part. But does this same documentation also note that I started with $10,000 of my own money?
My profit is only $1,000, so how do I let the IRS know that my income was only $1,000, if the document shows a disbursement of $11,000. Thanks!
When you say after tax money, you are referring to a Roth IRA. When you contribute to a Roth IRA, you don't take a deduction for contributing to an IRA and you when take the money out after age 59-1/2, the distribution is not taxable.
If you take money out prior to age 59-1/2, your distribution may be taxable and may be subject to a 10% early withdrawal penalty.
You are allowed to take out up to the amount you contributed, even if you are under 59-1/2. That is why you need to keep track of your IRA contributions.
In your hypothetical, you wouldn't be able to contribute $10,000 to an IRA all at once because you are limited to $6000 ($7000 if you are over 50) per year. You may be further limited due to high or very low earned income.
But say you had $10,000 you contributed over the course of two years, you withdraw $11,000. If you report your IRA basis as $10,000, only $1,000 would be taxable and subject to penalty, and that is only if you are under 59-1/2.
When you say after tax money, you are referring to a Roth IRA. When you contribute to a Roth IRA, you don't take a deduction for contributing to an IRA and you when take the money out after age 59-1/2, the distribution is not taxable.
If you take money out prior to age 59-1/2, your distribution may be taxable and may be subject to a 10% early withdrawal penalty.
You are allowed to take out up to the amount you contributed, even if you are under 59-1/2. That is why you need to keep track of your IRA contributions.
In your hypothetical, you wouldn't be able to contribute $10,000 to an IRA all at once because you are limited to $6000 ($7000 if you are over 50) per year. You may be further limited due to high or very low earned income.
But say you had $10,000 you contributed over the course of two years, you withdraw $11,000. If you report your IRA basis as $10,000, only $1,000 would be taxable and subject to penalty, and that is only if you are under 59-1/2.
Thank you very much. The important thing to me is when you said I need to keep track of my contributions. I'll do that!
When I receive my tax docs, I know the broker will the $11,000 withdrawal, and it will be up to me to let the IRS know the cost basis was $10,000? But documents won't spell out "only $1,000 is taxable" I assume?