How to Track Roth Contributions and Conversions
Roth Contributions and Roth Conversions are widely documented in the Financial Independence blogosphere. In addition, for many in the FIRE community who have contributed to 401(k) accounts during their career, performing Roth Conversions is frequently part of their strategy for accessing funds during early retirement.
One topic that we have not seen covered for the FIRE community is how to find official documentation on retroactively showing Roth contributions and Roth conversions if you no longer have your old tax documents. People are generally advised to keep tax documents for seven years. Beyond that point, tax documents are often disposed of, and that may have been the only record of how much you had contributed or converted into your Roth account. Knowing these amounts will be crucial if or when you decide to make withdrawals from your Roth account.
In this article, we cover how to document your Roth contributions and Roth conversions to make your CPA (or tax software) happy when it comes time to withdraw conversions or contributions in your 40s and 50s. While you could always “track it on a spreadsheet,” you may want to have more official documentation or to validate your spreadsheet with official documentation of the IRS.
As we have personal experience contributing to Roths, doing Roth conversions, and working with a CPA to anticipate withdrawals from Roth for part of our living expenses in our late 50s (before age 59.5), we are sharing our tips and process below.
Who We Are
Darren and I left corporate careers in our late 40s. We are nomadic except for the three months each year we spend in our tiny home in the Great Plains of the United States.
Each year, we spend 40 - 120 days thru-hiking in the EU and about 90 days in the Caribbean and Central America. This blog documents our path to nomadic living and financial independence & shares how we make the lifestyle work.
Our History with Roth 401(k) and Roth IRA
Darren and I had contributed to our workplace Roth 401(k)s for over 15 years until we were no longer eligible to contribute to them due to income exclusions. In 2018 and 2019, we did some small back-door Roth conversions while still with our employers. When we left our employers in our late 40s, we each rolled our Roth 401(k)s into Roth IRAs. We did this because the number of low-cost index funds available in the Roth IRA at the large brokerage firm we use was better than those our previous employers had available.
In 2021 we started doing Roth conversions. We recognized that we could withdraw Roth contributions anytime. We knew Roth Conversions needed to “age” for five years before we could touch them without penalty. We also knew we would not touch earnings in our Roth accounts until at least 59.5 years. We asked ourselves, “How are we going to untangle all of this and keep track of which dollars are from which source?” We each had one Roth account with this mixed bag of transactions. Essentially, we made a mess and knew it would be much easier to clear it up now in early retirement than several years from now when we want to start dipping into it.
What Is a Roth IRA?
Let’s start with some basics. A Roth IRA is an Individual Retirement Account to which you contribute after-tax dollars. Unlike the 401(k), there are no current-year tax benefits. In other words, funds that you contribute to a Roth IRA come from earned income that you pay taxes on. The long-term benefit is that growth on those contributions is tax-free. Another benefit to Roth 401(k)s and Roth IRAs is that you can access the contributions before age 59.5. However, the real benefit of a Roth IRA is tax-free growth if you let them grow until age 59.5 or later.
If you are still working, you may have access to a Roth 401(k) through your employer. If you work for a government agency, charity or non-profit, your plan may be called a Roth 403(b) or Roth 457(b).
To learn more about the eligibility and history of the Roth IRA and Roth 401(k), check out this detailed article.
What the Heck Are Roth Conversions?
Many employers offer employees the opportunity to invest part of their income “pre-tax” as part of the workplace plan. The immediate benefit to the employee is that these contributions lower their taxable income during that year. These contributions and any earnings will be taxed whenever they are withdrawn. Contributing pre-tax funds to a 401(k) can be beneficial, especially for those that expect that they are currently in a higher marginal tax bracket now than they will be later when they withdraw the funds.
In addition to paying taxes on withdraws from a 401(k), there is also typically a 10% penalty if that occurs before they reach 59.5 years of age. One exception to this penalty occurs if the funds are transferred from the 401(K) to a Roth IRA and allowed to “age” for five years. Of course, when the funds are transferred or “converted,” income tax will be owed in that tax year. The funds converted will be treated as additional income and added to the overall income included in their tax return for that year.
There are a few common reasons someone may want to perform Roth Conversions.
Tax rate arbitrage: Income invested in 401(k) accounts are not tax-free. The taxes are only deferred until they are withdrawn. Those that can manage their income levels from year to year or expect that they will be in lower marginal income tax brackets in the future, can choose when and how much to convert, effectively choosing how much income tax to pay.
Reduce RMD: Required Minimum Distributions (RMD) are minimum amounts of funds that the IRS requires people to withdraw from their tax-deferred accounts (401(k)) that generally begin in their early to mid-70s. Many people, especially those that work until their mid-60s, find themselves paying much higher taxes (marginal tax rates) once they begin taking RMDs than they would have paid when they were working and earning income at a lower tax bracket. By being proactive and converting earlier, one can reduce the amount they will be forced to withdraw later.
Access funds from 401(k) penalty-free earlier than 59.5: Typically, funds invested in a 401(k) may not be withdrawn until 59.5 without an added 10% penalty. However, once converted to a Roth and allowed to age five years, they are then accessible to be withdrawn (or allowed to grow tax-free). To read an excellent article on Roth Conversions and how to use them to bridge the gap between your early retirement date and age 59 1/2, check out How to Access Retirement Funds Early.
How Do I Track My Roth Contributions and Conversions?
You can simply track Roth contributions and conversions in a spreadsheet. Each time you make a contribution or conversion, make a new entry with the details in your spreadsheet. However, if you are ever asked to prove that an amount you are withdrawing is from a contribution or that your conversion is at least five years old, you may want something more official than a spreadsheet stored on a laptop somewhere.
In a marriage, one spouse might be the caretaker of the spreadsheet. If there is a divorce or the spreadsheet caretaker passes, a homemade spreadsheet may be inaccessible, so it’s good to know where to find official information. Keep reading to find out how.
Where Do I Find My Roth Contributions?
Roth 401(k) and Roth IRA contributions were reported on your W2 if employed and were on Form 5498 for employed and self-employed individuals. However, if you followed the IRS advice to shred any tax documentation over three or seven years old, then you likely don’t have all the information you need.
Perhaps your old employer has the info. Maybe but unlikely. Whether you stay with one employer or change employers over your working years, don’t count on the employer(s) keeping records of your Roth contributions! Most employers only keep old W2s for workers for less than seven years. The same goes for large accounting firms; they may keep your old tax records for seven years or less.
Oh, snap, all that recording of contributions over the last 10 or 20 years is now missing! Well, we’ve got good news. The information you need is recorded in IRS transcripts. These transcripts are free for the previous ten years and are available to purchase for previous years for $50 each.
Where Do I Find My Roth Conversions?
Roth Conversions are reported on your annual tax return. You will receive a Form 1099-R for the conversion from the IRA and an IRS Form 5498 documenting that the conversion was placed in your Roth IRA. And since you will be paying taxes on those conversions, that amount will show up on your 1040 tax return.
Similar to contributions, your Roth conversions are also documented in IRS transcripts. These transcripts are free for the previous ten years and are available to purchase for previous years for $50 each.
How Do I Get IRS Transcripts?
Getting IRS transcripts is super easy (and free if the transcripts are ten years old or newer).
If you (and your spouse) still need to create an online account with the IRS, you will need about 30 minutes each to make your account. If you are spending time outside of the United States, we highly recommend you (and your spouse if married) get the ID.me authentication app from the IRS so that you don’t need to fuss with text message authentication.
If you (and your spouse, if married) already have an IRS online account, accessing and downloading your 10-year histories will take 15-30 minutes, depending upon your internet connection.
The IRS tracks contributions and conversions to a Roth IRA at the individual level, not the household level, so you will need to download documentation for yourself and your spouse (if married), even if filing taxes jointly.
Here’s how:
Go to Get Your Tax Record on the IRS website.
Click “Get Access Online.”
Select “Other” as a reason for accessing account information.
Open up “Wage & Income Transcript.”
For each year, there is data; save and/or print the PDF.
Where Are My Contributions and Conversions in IRS Transcripts?
To find the amount of Roth contributions, search the PDF document for each year for the following line items depending upon your documentation/confirmation needs.
For employer plans, find the relevant contribution line item.
“Code ‘AA’ Designated Roth Contributions under a Section 401(k) Plan” for private enterprises.
“Code ‘BB’ Designated Roth Contributions under a Section 403(b) Plan” if your employer is a public school, church, or charity.
“Designated ROTH Contributions Under a Governmental Section 457(b) Plan” if your employer is a public school or governmental agency.
“Roth IRA Contributions” for self-employed individuals.
For Roth conversions, search out the line items in the transcript that reads “Roth Conversion Amount.”
What If I Need Transcripts Over 10 Years Old?
If you need an IRS transcript over ten years old and no longer have your old tax documentation, then you must fill out Form 4596. As of 2023, the fee for each older transcript is $43.
If you have any Roth 401(k) or Roth IRA contributions or conversions more than ten years old, depending upon the amount that you contributed or converted, it might not be worth the time or hassle to get those transcripts. Exceptions would be if you did a large conversion before 2012 and are considering spending some of that money in the coming years before hitting age 59.5.
What Do I Do with My IRS Transcripts?
The IRS transcripts are downloadable as PDF files.
You can store one hard copy in a locked, fireproof safe and save an electronic copy on a password-protected hard drive and in a password-protected cloud account.
If you also keep a spreadsheet for your records or convenience, as we do, you should now double-check that your figures match what your IRS Transcripts show and update accordingly if they do not.
Summary
Many DIY investors and early retirees have been told to track their Roth contributions and conversions in a spreadsheet. However, more official documentation from the IRS itself ensures that you have an uneventful distribution before age 59.5.
