Roth IRAs: How would they know... (Not a Tax Q)

Factual Questions
1

I understand money for a Roth IRA contribution uses “after tax” dollars; hence, one does not report contributions to a Roth IRA on the 1040 tax form. Hence, the only record of what you contributed is your financial institution’s records. So, since you can open more than one Roth IRA - not to exceed $6000 (or, $7000, depending on your age) per year - how would the IRS know?

I can only guess it is each financial institution’s obligation to report such contributions to the IRS? Is that how the IRS would know if you contribute too much per year into Roth IRAs?

2

Yes, this is the case. I’m not sure the exact mechanism it is reported to the IRS, but it is then sent to you on a 5498 IRA Contribution Form. There is a place to put that number into your tax filing with the IRS, but for a ROTH it won’t change the amount of taxes you owe. (Can you guess what I’m working on this weekend?)

3

Echoreply, thanks for confirming my suspicion.

4

I can confirm. The IRS will receive copies of the 5498 and will theoretically be able to track down your basis if you get audited.

5

What about 401k type plans if you work for two employers in the same year? If you set your contribution percentage very high, you could reach the max contribution with your first employer’s 401k, switch jobs, and then reach the max contribution with your second employer’s 401k. Even if you didn’t reach the max in each 401k, it seems like it would be common to have the combined contributions of both 401k plans be greater than the max 401k contribution allowed for an individual.

6

You can?

I was led to believe an individual can only have one of these since it is a unique investment vehicle which could be exploited if you were allowed to open as many as you want.

This is (basically) what my bank told me when I opened a Roth IRA (with Chase so not a small bank).

7

No rule that says you can’t have multiple Roth or Traditional IRAs, but the IRS limits the sum of your contributions across all your IRAs to the annual maximum.

For example, if you have two Roth IRAs and you contribute $2000 to one in 2021, you can only contribute a maximum of $4000 to the other. So there’s not much benefit to holding multiple IRAs.

Each institution may limit you to just one of each type though, so if you want already have a Roth IRA at Vanguard, you might have to sign up somewhere else like Merrill Lynch in order to open a 2nd Roth IRA.