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Roth IRA early distribution: Principal subject to 10% tax before 5 years?
Posted on 6/27/14 at 11:32 am
Posted on 6/27/14 at 11:32 am
I was told by my online broker that, if you take an early withdrawal of the principal in a Roth IRA, you are subject to a 10 percent penalty unless a certain time period elapsed. Is that correct?
I checked the IRS website and saw the five-year amount listed. The internet opinions regarding this are all over the place.
Regarding the 5-year rule:
"The distribution from the Roth IRA is
not a qualifieded distribution. The
portion of the distribution allocable
to earnings may be subject to tax
and it may be subject to the 10%
additional tax."
Page 72 of Publication 590 states states the sentence above. However, it only specifies earnings.
LINK
I checked the IRS website and saw the five-year amount listed. The internet opinions regarding this are all over the place.
Regarding the 5-year rule:
"The distribution from the Roth IRA is
not a qualifieded distribution. The
portion of the distribution allocable
to earnings may be subject to tax
and it may be subject to the 10%
additional tax."
Page 72 of Publication 590 states states the sentence above. However, it only specifies earnings.
LINK
This post was edited on 6/27/14 at 12:09 pm
Posted on 6/27/14 at 12:03 pm to LSUtoOmaha
quote:
The portion of the distribution allocable to earnings may be subject to tax and it may be subject to the 10% additional tax.
Sounds like your broker is wrong.
Posted on 6/27/14 at 12:06 pm to LSUtoOmaha
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.
If you had a traditional IRA, then your broker would be correct.
Posted on 6/27/14 at 12:12 pm to foshizzle
Is what I cited above enough? Basically I had to do this in 2012 for an unexpected expense, and last week I received notification from the IRS that I owed $2800 from documentation that the Clearing House sent (basically they wanted me to pay taxes, interest, and a 10% penalty on a Roth IRA withdrawal).
I called the broker and they agreed the IRS was just provided inaccurate information regarding the type of IRA withdrawal it was (principal, not earnings), but they insisted I owed the 10% penalty. I do not think I owe anything, as I withdrew $8200 of solely principal.
I called the broker and they agreed the IRS was just provided inaccurate information regarding the type of IRA withdrawal it was (principal, not earnings), but they insisted I owed the 10% penalty. I do not think I owe anything, as I withdrew $8200 of solely principal.
Posted on 6/27/14 at 12:33 pm to LSUtoOmaha
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.
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.
Posted on 6/27/14 at 2:17 pm to LSUFanHouston
I read the instructions on Form 8606, Part III. Sounds like I should be good.
Thanks for your help!
Thanks for your help!
Posted on 6/27/14 at 2:30 pm to LSUtoOmaha
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.
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.
Posted on 6/27/14 at 3:34 pm to LSUFanHouston
This thread delivered.
Posted on 6/27/14 at 5:06 pm to LSUFanHouston
No IRA conversions. Just Roth contributions. Thanks.
Posted on 6/28/14 at 5:54 pm to LSUtoOmaha
You can also make withdrawals from a Roth for educational purposes.
Posted on 8/7/14 at 3:34 pm to LSUtoOmaha
Just wanted to say, thanks to the help of this board, I submitted paperwork and an explanation to the IRS, and got a letter back today saying I owed nothing.
Posted on 8/7/14 at 3:41 pm to LSUtoOmaha
once you've exhausted your own Roth contributions, what happens with employer matching contributions, are they taxed/penalized?
Posted on 8/7/14 at 4:25 pm to Ford Frenzy
Once again, LSUFanHouston rates a prize for "helpful post of the week".
Posted on 8/26/14 at 2:02 pm to Ford Frenzy
Can you elaborate on your question? Are you talking about withdrawing from a Roth 401k, or are you referring to withdrawing from a Roth IRA after being converted from a 401k that you had with a previous employer?
Posted on 8/26/14 at 2:08 pm to LSUtoOmaha
quote:
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.
I was wondering where employer matching contributions stacked up in this distribution bucket order
Posted on 8/26/14 at 2:28 pm to Ford Frenzy
Employers don't match in Roth's.
Posted on 8/26/14 at 3:19 pm to LSUchuck
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.
Posted on 8/26/14 at 3:33 pm to Ford Frenzy
Any contribution that an employer makes to a 401(K) or similar account is a pre-tax, regular contribution - i.e. not a Roth.
So if you have a 401(K) with Roth designated contributions, you really have two balances - one with your contributions, and one (that is not a Roth) with the employer contributions.
Once you rolled your 401(K) balance to an Roth IRA, that amount would end up in Bucket 2.
So if you have a 401(K) with Roth designated contributions, you really have two balances - one with your contributions, and one (that is not a Roth) with the employer contributions.
Once you rolled your 401(K) balance to an Roth IRA, that amount would end up in Bucket 2.
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