General Question please, about Profit reporting from an investment

[tphtph]

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!

[JulieS · Accepted solution]

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.

[tphtph]

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? 

[fanfare]

except for removal of excess earnings, your custodian never knows the taxable amount on your IRA or Roth IRA distribution.

 That's why you need tax software to assist you to calculate that.