Roth Basis and Start Year: Why It's Important

When rolling over a Roth account, there are two key pieces of information you’ll need to ensure a smooth transaction: your Roth basis and the first year of Roth contributions. Understanding these terms will help you avoid unnecessary taxes and penalties while keeping your retirement savings on track.

What is Roth Basis and Why is it Important?

Your Roth basis is the total amount of after-tax contributions you've made to a Roth account. It excludes any earnings on those contributions. This is important because your Roth Basis has already been taxed, meaning when withdrawn, it will not be taxed or penalized. In contrast, your earnings may be subject to taxes and penalties if certain conditions aren’t met.

When making Roth contributions to a retirement plan, your plan provider tracks your Roth basis to ensure accurate tax reporting when you take distributions. If you roll over Roth funds to another provider, you’ll need to provide your Roth basis so the receiving institution can continue tracking it correctly.

Why is the First Year of Roth Contributions Important?

The IRS applies a five-year rule to Roth accounts, which determines when earnings can be withdrawn tax-free. The five-year clock starts on January 1 of the first tax year you made a Roth contribution—not with each individual contribution. If you withdraw earnings before meeting this rule and/or before age 59½, those earnings could be subject to income tax and a 10% penalty.

When rolling over Roth balances, your first year of Roth contributions must be recorded to maintain the correct tax status for future distributions. Like your Roth basis, this information is tracked by your retirement plan provider and should be passed along during rollovers.

Key Takeaways

• Roth basis is the portion of your Roth balance that consists of contributions, not earnings. It has already been taxed and would avoid any additional taxes or penalties at distribution.
• The first year of Roth contributions determines whether your balance meets the five-year rule for tax-free earnings withdrawals. If your Roth account is less than five years old or you are under age 59½, earnings withdrawals may be subject to taxes and penalties.
• Retirement plan providers track both your Roth basis and first year of Roth contributions. This information must be provided when completing a rollover to or from Greenleaf Trust.

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