Form 5498 + 5-Year Tax Rule + Roth Account Withdrawals
I understand, that in general, a Roth account must be owned/opened for a period of 5 years before tax-free withdrawals can be made on initially deposited funds. Likewise, money moved from a traditional IRA into a Roth account, for example annual recharacterizations, are also each subject to separate 5-year withholding periods before those funds can be withdrawn to avoid a 10% penalty. In addition, a Form 5498 is issued to owners for tax information purposes to: (1) identify annual deposits into the account and (2) to show its the fair market value (FMV).
Question (my understanding is): The FMV on the Form 5498 is a mix of both old and new money in the account, but it doesn’t show how much has been in the account for at least 5-years and available to be withdrawn tax-free. If the Roth account growth consists of both recharacterized deposits and normal investment profits, how are withdrawals identified as being in the account for at least 5 years to avoid a withdrawal penalty?
Permalink Submitted by Alan - IRA critic on Thu, 2024-02-08 23:09
Amounts from regular Roth IRA contributions including recharacterized TIRA contribution can be withdrawn any time without tax or penalty. There is no 5 year holding requirement for these distributions. However, pre tax conversions must be held 5 years (or until 59.5 if sooner) before they can be withdrawn without the 10% penalty. Form 5498 reports regular Roth IRA contributions and conversions in different boxes, so the IRS can see the type of contributions made to the Roth IRA. Form 5498 also shows the total value of the account with no breakdown as you indicated. It’s up to you to track your Roth IRA regular contribution basis and separately your conversion basis and year of conversions. Any distributions you take from your Roth IRAs that are non qualified (prior to 5 years and 59.5) are taxed according to the Roth IRA ordering rules, and your regular contribution balance comes out first (tax and penalty free), conversions next, and gains last. In other words, if you not keep track of your contributions breakdown, you will not be able to correctly file Form 8606 to report the distribution. It’s not clear whether the IRS also keeps track of this info even though they receive Form 5498 each year and have the data is they retain it in useable form.
Permalink Submitted by Gale Nelson on Fri, 2024-02-09 21:05
I appreciate your comments. In my case I’ve been funding my Roth with $$$ from an existing traditional IRA brokerage account. First, the RMD is withdrawn from the IRA and deposited into a non-IRA brokerage account. Once RMD requirements are met, I then withdraw additional funds out of the IRA account and make a direct contribution into the Roth account. The combined RMD and recharacterized money from the IRA is all reported and claimed as income on a Form 1099-R. Guess my confusion is that I thought all money contributed to a Roth had to be after-tax dollars. I did not realize pre-tax or non-qualified money contributions were allowed in a Roth and then the taxes paid when this money was withdrawn later.
Permalink Submitted by David Mertz on Fri, 2024-02-09 22:36
Claiming the taxable traditional IRA distributions on the tax return makes the amount distributed be after-tax money, so the amount deposited in to the Roth IRA *is* after-tax money.