It may seem like a waste of time, digging through your records, faithfully documenting your Roth IRA contributions when you file your tax return each year.  There’s no immediate tax benefit, so why bother?

There are 3 compelling reasons to be diligent about this reporting, believe it or not.  Two can potentially benefit you (or prevent trouble) in the long run, and the last one could potentially benefit you today.  Here they are:

  • To make it easier to get money out

One of the most attractive aspects of the Roth IRA is the potential for tax free growth.  If you’ve owned a Roth for at least 5 years, and you are over the age of 59 ½, you can withdraw Roth funds totally tax- and penalty-free.  But what if you’re younger than that and you need to take money out?  You potentially CAN (tax- and penalty-free) IF you can prove you are taking out only what you have put in.  That’s right, you can take out your principal anytime (not recommended, mind you, but allowable).  But you need to know your basis.  The easiest way to find this info is to be consistent about claiming your contributions on your taxes each year.  Most tax software and/or CPA’s are then easily able to track this for you.  So be sure to tell them about it!

  • To prevent headaches down the road

Most IRA contributors are aware of the qualification limits on IRA’s, but sometimes things get forgotten or overlooked.  This is where telling your CPA or tax software about your Roth contributions can help keep you out of trouble.  If you enter a contribution that does not qualify, you should get an alert.  You can then decide if you want to remove or recharacterize the contribution, and avoid the 6% tax penalty.

What kinds of contributions do not qualify, you ask?  If you don’t have earned income, or if you have too much earned income (starting at $120,000 AGI for single taxpayers and $189,000 AGI for married filing jointly for tax year 2018), you will need more creative strategies than making a regular Roth IRA contribution.

  • To potentially qualify for the Retirement Savers Tax Credit

This is one many tax payers don’t know about!  Not everyone qualifies (generally this only applies to lower-income workers – under $31,000 for single taxpayers or $63,000 for married filing jointly), but it’s still good to be aware of.  Anyone over age 18 who is not a full-time student, and not claimed as a dependent, may qualify for a tax credit of up to $1000 per person.  When you or your CPA enter your Roth IRA contribution into a tax program, the program should let you know if you qualify for this credit.  If you don’t enter the contribution, you won’t get an alert, and may miss out on potential tax savings. See IRS Form 8880 for details.

But Laura, I don’t get a tax form for my Roth IRA contributions until it’s too late (Form 5498 comes out in May for most financial institutions).  So how am I supposed to know what to claim? You’re right – that’s where keeping good records falls on you.  Keep a note with your tax information so you remember.  For example, if you write a check or initiate a bank draft, include “Roth IRA” and the tax year in the memo line.  If you use software like Mint to track your finances, add a note to the transaction.  A little organization saves a lot of time.  Your future self will thank you.



Shadowridge Asset Management, LLC does not offer tax planning or legal services, but may provide references to accounting, tax services or legal providers. They may also work with your attorney or independent tax or legal advisor.