Roth IRA early distribution: Principal subject to 10% tax before 5 years?

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The portion of the distribution allocable to earnings may be subject to tax and it may be subject to the 10% additional tax.

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Sounds like your broker is wrong.

Your broker is wrong. You can withdraw up to the total amount you have contributed at any time without paying taxes or penalties. Anything above that is subject to it though.

If you had a traditional IRA, then your broker would be correct.

Roth's are confusing. Your Roth balance is made up of four buckets. When distributions are made, they are assumed made from the first bucket until exausted, and then down to the second, third, and fourth buckets.

1) Regular Roth contributions
2) Taxable conversion contributions (i.e. rolling a trad IRA into a Roth, you pay tax on an amount that you convert)
3) Nontaxable conversion contributions (if you had a traditional IRA you converted to a Roth, and that traditional IRA had nondeductible contributions in it, this amount would go here)
4) Earnings

Amounts taken out of the first bucket are tax and penalty free at any time.

Amounts taken from the second bucket are not subject to income tax. However, if the 5 year clock has not been met, these amounts are subject to the 10 percent penalty. There are exceptions available to this penalty.

Amounts taken from the third bucket are not subject to income tax, nor 10 percent penalty, no matter when they are withdrawn.

Amounts taken from the fourth bucket are subject to income tax unless they are qualifed distributions (qualified distributions are ones that meet the 5 year test AND the 59.5 age test (the exceptions to the 59.5 year age test are disability, first time homebuyer, and inherited assets). Further, if they are not qualified distributions, they are subject to the 10 percent penalty, unless one of the standard penalty waivers apply.

Confused yet???

When you filed the tax return in 2012, you should have filed Form 8606, Part III, and you may have had to file Form 5329 if you had a penalty issue. You need to complete those now and send them back with the IRS notice.

You indicated above you withdraw $8,200 of "principal." If all of that was actual Roth IRA contributions, and not IRA conversions, then yes, fill out the Part III and send it in. Attach a statement saying that you are very sorry that you did not include it originally.

That's the only way the IRS knows that it's not taxable. Otherwise, it just sees the 1099 that your broker sent in to them, and assumes it is indeed taxable and subject to penalty.

No IRA conversions. Just Roth contributions. Thanks.

You can also make withdrawals from a Roth for educational purposes.

once you've exhausted your own Roth contributions, what happens with employer matching contributions, are they taxed/penalized?

bump for my question

quote:

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Roth's are confusing. Your Roth balance is made up of four buckets. When distributions are made, they are assumed made from the first bucket until exausted, and then down to the second, third, and fourth buckets.

1) Regular Roth contributions
2) Taxable conversion contributions (i.e. rolling a trad IRA into a Roth, you pay tax on an amount that you convert)
3) Nontaxable conversion contributions (if you had a traditional IRA you converted to a Roth, and that traditional IRA had nondeductible contributions in it, this amount would go here)
4) Earnings

Amounts taken out of the first bucket are tax and penalty free at any time.

Amounts taken from the second bucket are not subject to income tax. However, if the 5 year clock has not been met, these amounts are subject to the 10 percent penalty. There are exceptions available to this penalty.

Amounts taken from the third bucket are not subject to income tax, nor 10 percent penalty, no matter when they are withdrawn.

Amounts taken from the fourth bucket are subject to income tax unless they are qualifed distributions (qualified distributions are ones that meet the 5 year test AND the 59.5 age test (the exceptions to the 59.5 year age test are disability, first time homebuyer, and inherited assets). Further, if they are not qualified distributions, they are subject to the 10 percent penalty, unless one of the standard penalty waivers apply.

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I was wondering where employer matching contributions stacked up in this distribution bucket order

I would presume they do in Roth 401ks. That is why I am wondering if he is getting them confused. I don't know of a scenario in which you would be drawing employer contributions from a Roth IRA unless it was part of a rollover.