Do I Need to Claim Roth Dividends on My Tax Return?
Both traditional and Roth Individual Retirement Accounts provide tax-deferred earnings and growth, but with a Roth IRA you also get the ability to withdraw the money tax-free once you retire. That means you can enjoy many years of tax-free growth, with no tax consequences once you start taking the money out. These tax-free withdrawals apply if you are at least 59 1/2 when you start taking money out. If you are under that age, you must pay taxes on the gains in the account if you withdraw money from those gains.
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Tax-Free Growth
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The money you put into a Roth IRA is allowed to grow tax-free through the years. That means that any dividends and capital gains you make along the way are not subject to taxation, either in the year they are earned or any time down the road. The availability of tax-free earnings makes the Roth IRA a perfect vehicle for high dividend stocks and mutual funds, and for funds with high capital gains and turnover that make them unsuitable for taxable accounts.
Tax-Free Distributions
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When you retire and start taking money out of your Roth IRA, the money you withdraw is not subject to federal taxation. This is different from a traditional IRA, where the withdrawals are taxed when you take them out in retirement. To get these tax benefits, you must follow the rules established by the Internal Revenue Service, but as long as you do, you can enjoy tax-free distributions from your Roth IRA for life.
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Annual Report
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You should receive a report from the administrator of your Roth IRA each year showing the amount you contributed for that year. Even though the money you make from your Roth IRA is not taxable, it is important to retain these documents and keep them with your tax records. When you file your taxes using a tax preparation software package, you will be prompted to enter the amount of your Roth IRA contribution.
Record Keeping
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You need to keep careful records of the money you contribute to your Roth IRA accounts throughout the years. Having a record of everything you put in is important, especially if the IRS ever questions the amount you contributed and your eligibility for those valuable tax-free withdrawals. You should keep all of the annual IRA contribution statements you receive from the administrator, especially if you hold more than one Roth IRA. You can have multiple Roth IRA accounts, but if you do hold multiple accounts it can be that much harder to keep track of your annual contributions and the earnings on each account.
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References
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