How to take a distribution from a ROTH before 59.5

[david9821]

I want to take a distribution from my ROTH IRAs that is less than the conversion amounts I did that were all 5 years and older plus my initial contribution 20 years ago. I am not 59.5. I believe I can do that without tax or penalties but how do I prove that the distribution is less than the conversions and contribution? I think I need to know when each contribution and conversion was made. Do I need to know it? Is there a way to get that info, if you don't have your tax paperwork or forms from way back 20 years ago?

[dmertz · Accepted solution]

As with any nonqualified distribution from a Roth IRA, TurboTax prepares Form 8606 Part III to calculate the taxable amount.  When you click the Continue button on the Form 1099-R Entries page, TurboTax will ask for your basis in Roth IRA contributions and conversions to complete the entries on Part III needed to calculate the taxable amount (which will be zero in your case); yes, you must provide this information.  TurboTax will also use the information to determine that there is no penalty to be reported on Form 5329.

The Roth IRA custodian(s) have sent Forms 5498 (as well as Forms 1099-R reporting distributions that would have previously reduced your basis to some extent) to you and to the IRS to document the contributions and conversions, so the IRS already has the information needed to substantiate the entries on Form 8606 Part III.  If you don't still have these documents yourself, it might be difficult to get copies from either the IRS or from the IRS custodian going back 20 years.  Approximating the values might be your only option.

Be aware that distributions from your Roth IRA that are not rolled over eliminate the possibility of future tax-free growths on that amount, so a Roth IRA distribution should generally be a funds source of last resort.

[david9821]

So I need to find my forms 5498? Maybe a problem but I might find them.

I have had no distributions yet and the amount I am considering to withdraw will be far less than the total of conversions that have aged 5 years or more. I can probably just submit that info. For me I will be 59.5 by the end of 2021 so it is only a problem (small problem for 1 year).

After I turn 59.5 I have no tracking issues to deal with, I think.

ROTHs are the best for long term investment I know. Except maybe highly appreciated stock if you will be dying soon and someone will get the stepped-up basis.

[macuser_22]

It can only be an "early" distribution if before age 59 1/2, after that it is no longer early so no penalty can apply.  Your prior contributions are irrelevant.

[NCperson]

<<ROTHs are the best for long term investment I know. Except maybe highly appreciated stock if you will be dying soon and someone will get the stepped-up basis.>>

but isn't a Roth better even for 'highly appreciated stock'...

for a Roth the taxes have already been paid before the appreciation occurs and I don't have to distribute the stock out of the Roth for 10 years after the death of the account owner.

for an after tax account, the stock gets stepped up at death of the owner, but the appreciation after the date of death is eventually subject to capital gains tax

if there is a highly appreciating stock, half in a Roth and half in a non-qualifying account and then the beneficiary sells out 10 years after the owner dies.   For the Roth, there is no tax on any of the appreciation, but for the non-qualifying account, there would be capital gains tax on all the appreciation that occurred during those 10 years. right? 

[dmertz]

The recent changes to the tax code requiring many non-spouse beneficiaries to drain an inherited Roth IRA within 10 years does make the choice between passing to beneficiaries Roth IRAs or highly appreciated stock more difficult since the tax-free growth potential of the Roth IRA is more limited than before.  Still, for someone under age 59½, it seems that one might usually still have enough time for tax-free growth in the Roth IRA to more than make up for the tax hit that would otherwise be avoided by passing along highly-appreciated stock with a stepped-up basis.  It might take some clever modeling to determine what produces the largest after-tax inheritance, if that's your goal.  Of course It would be nice to pass along both the Roth IRAs and highly appreciated stock, if that's practical.  But if you expect to end up spending a majority of your savings before you die, leaving the Roth IRA until last probably makes the most sense since you'll end up with tax-free growth instead of capital-gains-taxable growth in the interim.