Gyroscopic Investing

According to IRS Pub 590, it's OK for someone to remove their contributions to a Roth IRA, tax and penalty free, at any time, for any reason.

I cannot find how one documents this to the IRS. As it stands, if you simply take a distribution, your IRA custodian will issue a 1099 to the IRS, and as far as the IRS knows, you owe full tax and penalty on the full amount on the 1099.

There must be some way to document on your tax return that your 1099 is really principal contributions, rather than doing so in an audit.

My friend did a contribution withdrawal and then got audited because he neglected to file paperwork. Upon research I cannot find what paperwork one is supposed to file. The paperwork I saw is for IRA distributions of a regular kind.

i'm wondering about this also...maybe its guilty until proven innocent?

From what I can tell the "workflow" is to make the withdrawal, get a 1099, do nothing on taxes, get audited, and send a letter to the IRS with supporting documents to prove this was a principal contribution that you withdrew.

That seems ridiculous, but I can't figure out how it's "supposed" to work.

I plan to use SEPP during early retirement, but if I can do principal contribution withdrawals for a few years before activating SEPP, it gives me more flexibility.

I think this would be reported on the second page of form 8606.  Check out the instructions for form 8606 on the IRS web site and see if this answers your question.