I bought a house in 2022 and used $15,000 from my Roth IRA on Vanguard for part of the purchase. My account still had $10,000 left after that. Over the years, I’ve been putting in $3,000 to $5,000 annually, and the account earned about $4,000 from investments.
Now I’ve received a letter from the IRS saying I owe around $5,000 on the $15,000 I took out, and they’re asking for Form 8606 if I think it wasn’t taxable. From what I understand, I can withdraw the amount I contributed without taxes since I’ve already paid taxes on those contributions. I just can’t withdraw any part of the earnings without taxes.
For example, if I contributed $15,000 and my account grew to $20,000, I can withdraw $15,000 tax-free. But if I took out $16,000, I’d owe taxes on the extra $1,000. Is this correct?
You’ve got the right idea. When you withdraw money, you need to file Form 8606 to tell the IRS that the withdrawal came from your contributions and not earnings.
If the IRS needs proof, you’ll have to provide documentation like your Form 5498 from Vanguard. It sounds like they just want you to file the 8606 now. If your withdrawal was less than your total contributions, you shouldn’t owe taxes.
Make sure to grab your Form 5498s from Vanguard and save them forever. The IRS only keeps records for ten years, so it’s a good idea to store these on your computer or cloud storage. This way, you’ll always have proof of your contributions if it comes up again.
@Soren
One thing to add: If you’re using the money for a first-time home purchase, there’s a $10,000 lifetime limit you can take out without paying the 10% early withdrawal penalty. You’d still owe income tax on the earnings portion, but this could help if your contributions weren’t enough. Check out the IRS page on early distribution exceptions for more details.
You need to report early Roth IRA withdrawals on your tax return. The IRS flagged your missing 1099-R. They’re asking for Form 8606 because it shows that the money came from contributions. Just fill it out correctly, and you should be good to go.
You should check out IRS Publications 590-A (for contributions) and 590-B (for withdrawals). They explain everything about Roth IRAs. Here are the links:
You’ve got the basics right, but the problem is likely how it was reported. Even if the withdrawal isn’t taxable, you still need to report it on Form 8606. That’s how the IRS knows it’s nontaxable.
Did you use tax software or file by paper? Some free software doesn’t handle Roth IRA withdrawals well. I used H&R Block software for my own Roth withdrawal and had to fill out both Form 8606 and Form 5329 (with exception code 9).