Any reason to keep track of lots, or even transactions, in an IRA?
January 4, 2014 4:55 PM Subscribe
Am I understanding the USA's IRA laws correctly that all I really have to keep track of, in order to eventually (years from now) take money out without penalty or double taxation or such, is the amount of after-tax money I put into it over the years?
For example, let's say this year I put in $5,000, of which $1,000 is after-tax. Then for the next 19 years, I put in $5,000 more each year, none of which is after-tax. Over those twenty years, I do all sorts of wacky transactions in the account itself - I buy this stock, I sell half of it, I get dividends, I buy another stock, blah blah blah. If this were a normal (non-retirement) account, I'd be keeping strict track of all of those things, down to the specific lot level, so that I could correctly (and optimally) keep track of tax-related events like capital gains. But am I understanding correctly that since this is an IRA, all I have to know, in order to correctly and optimally pay taxes when I eventually withdraw, is "Over the years I have put in $1,000 of after-tax money"?
To be clear, I'm interested in whether there's any tax-related reason to keep track of more than just the after-tax contributions, not merely assuming that I'd be taking stuff out at the "normal" time. For example I'd also be interested if there were some benefit to having kept track of all this if it winds up I withdraw stuff early (whether via penalty or via something like a SEPP). Or if there's some benefit to having kept track if I eventually wind up converting from one IRA type to another. Or any such thing.
Also, in case it matters: I have both a traditional IRA and a Roth IRA. The traditional has both pre-tax and after-tax contributions. I am interested in this question for both.
For example, let's say this year I put in $5,000, of which $1,000 is after-tax. Then for the next 19 years, I put in $5,000 more each year, none of which is after-tax. Over those twenty years, I do all sorts of wacky transactions in the account itself - I buy this stock, I sell half of it, I get dividends, I buy another stock, blah blah blah. If this were a normal (non-retirement) account, I'd be keeping strict track of all of those things, down to the specific lot level, so that I could correctly (and optimally) keep track of tax-related events like capital gains. But am I understanding correctly that since this is an IRA, all I have to know, in order to correctly and optimally pay taxes when I eventually withdraw, is "Over the years I have put in $1,000 of after-tax money"?
To be clear, I'm interested in whether there's any tax-related reason to keep track of more than just the after-tax contributions, not merely assuming that I'd be taking stuff out at the "normal" time. For example I'd also be interested if there were some benefit to having kept track of all this if it winds up I withdraw stuff early (whether via penalty or via something like a SEPP). Or if there's some benefit to having kept track if I eventually wind up converting from one IRA type to another. Or any such thing.
Also, in case it matters: I have both a traditional IRA and a Roth IRA. The traditional has both pre-tax and after-tax contributions. I am interested in this question for both.
I am not an accountant by any means. But I do know that Roth withdrawals (up to and including the entire principal + interest) are not taxable if you take withdrawals after the age of 59 1/2.
And to my knowledge, conversely, any traditional IRA withdrawals are fully taxable as income after the age of 59 1/2, since the tax savings are at the time of deposit. (Roths incur no tax savings at the time of deposit.) If you withdraw from a traditional IRA before the age of 59 1/2, you not only pay tax on the entire withdrawal as income, but pay a substantial additional penalty for early withdrawal.
It's a good idea to keep track of your total balance in both types of IRA's, so that you know how much you can withdraw, with or without penalty.
posted by RRgal at 5:31 PM on January 4, 2014
And to my knowledge, conversely, any traditional IRA withdrawals are fully taxable as income after the age of 59 1/2, since the tax savings are at the time of deposit. (Roths incur no tax savings at the time of deposit.) If you withdraw from a traditional IRA before the age of 59 1/2, you not only pay tax on the entire withdrawal as income, but pay a substantial additional penalty for early withdrawal.
It's a good idea to keep track of your total balance in both types of IRA's, so that you know how much you can withdraw, with or without penalty.
posted by RRgal at 5:31 PM on January 4, 2014
You need to keep track of the money you put into and take out of an IRA. You don't need to keep track of the transactions (stock/fund purchases and sales) that happen inside an IRA. They're all tax sheltered so that stuff becomes irrelevant.
I'm not an account, but I do almost all of my trading inside my IRA for just this reason.
posted by alms at 6:41 PM on January 4, 2014 [1 favorite]
I'm not an account, but I do almost all of my trading inside my IRA for just this reason.
posted by alms at 6:41 PM on January 4, 2014 [1 favorite]
I think people keep track of their non-deductible IRAs by using IRS form 8606.
posted by Dansaman at 6:50 PM on January 4, 2014
posted by Dansaman at 6:50 PM on January 4, 2014
Best answer: That is why you need to file Form 8606. It keeps track of your "basis" in a traditional IRA, if you mix deductible and non-deductible contributions to an IRA. There is no other recordkeeping otherwise. And, when you take out money from the traditional IRA, you are taxed on a pro-rata basis of the money taken out. So if you had $1,000 in after-tax contributions and $49,000 in earnings and pre-tax contributions, 95% of any dollar you take out is taxable.
For a Roth IRA the Form 5498s that are issued every year cover that. When you take money out of a Roth, it is deemed to come out in the following order: contributions, taxable distributions, nontaxable distributions, and finally earnings. This automatically minimizes the amount of taxes that are paid.
posted by calwatch at 9:31 PM on January 4, 2014 [2 favorites]
For a Roth IRA the Form 5498s that are issued every year cover that. When you take money out of a Roth, it is deemed to come out in the following order: contributions, taxable distributions, nontaxable distributions, and finally earnings. This automatically minimizes the amount of taxes that are paid.
posted by calwatch at 9:31 PM on January 4, 2014 [2 favorites]
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posted by Flunkie at 5:08 PM on January 4, 2014