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Is Roth IRA Distribution taxable?/after selling


Guest gzwick26

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Guest gzwick26

I took out money that I need for an emergency from my Roth Ira(I took out the $15,000 in contrbutions I had put in so far). Am I correct that I don't have to pay any teaxes on the distribution of my contributions? Also, am I allowed to put the amount back in in the future if I'm able to? Thanks.

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Your withdrawal will be proportional amounts of your after-tax Roth contributions and the yet-to-be-taxed investment earnings. You cannot simply withdraw the after-tax contributed amounts, leaving all the investment earnings in the IRA. If your Roth IRA has existed for 5 years and you are at least age 59 1/2 years (or it is for "qualified first-time homebuyer expenses" or you have become disabled), you might not be taxable on the investment earnings portion of your withdrawal. For the 5 year requirement, the withdrawal had to be after the end of the 5th year beginning with the first year FOR WHICH a contribution was made to the Roth IRA.

You can re-contribute that $15,000 if done within 60 days of your withdrawal. After that, you cannot make up that $15,000; only having the ongoing opportunity for new Roth contributions: $4,000 per year.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Guest gzwick26

My account was worth $15,600 and I had contributed $15,000. I took out the $15,000 I contributed. I'm not correct that this is tax free because it was after tax dollars I had contributed? The remaining $600 remains in the Roth Ira. That would be my earnings thus far, I believe.

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Given your second post, I dug into the statute and I believe you are correct. IRC sec 408A(d)(4)(B)(i) provides a special ordering rule for applying IRC sec 72, that allows tax-free distributions from a Roth IRA to the extent of contributions previously made.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Guest gzwick26

Thank you. Am I correct that I can put some of the $15,000 back into it if I'm able to within the 60 day period? I wouldn't be able to put all of it back in but possibly some of it.

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IRS Private Letter Ruling 9010007 (December 14, 1989) specifies that re-contribution within 60 days of withdrawal from an IRA is considered a "rollover" and preserves its tax-advantaged status, and the re-contribution is not considered 'excess contributions' to the IRA for the year restored. The facts of that PLR posit the individual returning to the IRA the entire amount withdrawn, within 60 days. The issue of whether a partial re-contribution would be then a partial "rollover" and preserve its tax-advantaged status was not present on those facts nor discussed.

I've not seen any ruling or guidance that specifically allows or prohibits less than the withdrawn amount to be re-contributed and preserve the tax-advantaged status. It seems logical and reasonable that you could do so, but not all rules (including tax rules) are logical and reasonable.

FYI, the 5th Circuit Court of Appeals has ruled (in an unpublished 1993 decision) that an IRA owner can only do this type of withdrawal/re-contribution "rollover" once per year. Martin v. Commissioner.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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…so, in sum…

Based on the ordering rules, distributions from your Roth IRA ( or Roth IRAs as if you have more than one , they would be treated as one IRA for this purpose) will first be attributed to your regular contributions, then conversion amounts-if any-, then earnings.

So, if you have made regular contributions of $15,000 or more to your Roth IRA/s, and you have never taken a distribution from your Roth IRA/s, the $15,000 will be tax and penalty-free. If you have taken distributions from your Roth IRA before, then those amounts would be counted as part of the contributions that have already been distributed.

You can rollover the $15,000, or a portion of it, within 60-days. The 60-day period starts the day after you receive the distribution.

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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Appleby question:

If part of the $15,000 was a 2008 contribution, can they add it back any time before April 15, 2008 or is that also limited to 60 days?

Observation:

In an era of cheap money, "money on sale", you have many options for meeting a short term emergency...home equity loan, credit cards, signature line, family loan, employer advance, etc. You should consider all of these options before trying to swing a 60 day "loan" from your Roth.

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Appleby question:

If part of the $15,000 was a 2008 contribution, can they add it back any time before April 15, 2008 or is that also limited to 60 days?

Observation:

In an era of cheap money, "money on sale", you have many options for meeting a short term emergency...home equity loan, credit cards, signature line, family loan, employer advance, etc. You should consider all of these options before trying to swing a 60 day "loan" from your Roth.

In my opinion, once the 2008 contribution was deposited, it would also be subject to the 60 day re-deposit/rollover rule. The withdrawal of the 2008 amount if any within the 2008 contribution period does not constitute a reversal of the contribution which could be deposited at a later date beyond the 60 days but within the 2008 contribution period. (no do overs)

Example: 2008 contribution deposited January 10 2008. Withdrawn as part of the $15,000 withdrawal mentioned above. It is included in the amount that must be re-deposited within 60 days to be a valid rollover. The contribution for 2008 will be reported as a 2008 contribution on form 5498 for 2008 sent by May of 2009. The withdrawl of the $ 15,000 will be reported as a 2008 distribution on form 1099R for 2008 reported in January of 2009. Any rollover of funds within the 60 Day Period will be reported on the 2008 form 5498 as well.

JEVD

Making the complex understandable.

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I understand you answer. I was thinking about what would happen if you could withdraw a contribution for a year and then later in the year, redeposit that contribution. Seems like to different rules might apply.

As I am not a tax accountant or lawyer, I thought it was worth posing a option that I have never seen discussed here.

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It is a good question. The solution ( of recontributing the amount as an IRA contribution by the tax filing deadline) could work if the entire balance was distributed from the IRA. This is because a distribution of the entire balance meets the requirement to be treated as a return-of-excess-contribution. Since a return of excess technically zeroes out the contribution bucket for tax purposes, contributing an additional amount for the year is permissible. If the same IRA is used, the challenge is to get the custodian to allow the contribution, especially if their system blocks the contribution bucket from exceeding the limit for the year…since, as JEVD explained, the contribution is still reported on IRS form 5498 for the year even if it is removed.

Example:

Roth IRA balance includes contribution of $4,000 made for 2007.

Entire Roth IRA balance , including earnings, was distributed December 2007 .

The entire balance can be rolled over within 60-days. If the 60-day deadline is missed, $4,000 can be contributed as a regular contribution for 2007. The 5498 will show a total contribution of $8,000 for 2007, which means the taxpayer will need to explain to the IRS that $4,000 was removed as a return-of-excess.

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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It is a good question. The solution ( of recontributing the amount as an IRA contribution by the tax filing deadline) could work if the entire balance was distributed from the IRA. This is because a distribution of the entire balance meets the requirement to be treated as a return-of-excess-contribution. Since a return of excess technically zeroes out the contribution bucket for tax purposes, contributing an additional amount for the year is permissible. If the same IRA is used, the challenge is to get the custodian to allow the contribution, especially if their system blocks the contribution bucket from exceeding the limit for the year…since, as JEVD explained, the contribution is still reported on IRS form 5498 for the year even if it is removed.

Example:

Roth IRA balance includes contribution of $4,000 made for 2007.

Entire Roth IRA balance , including earnings, was distributed December 2007 .

The entire balance can be rolled over within 60-days. If the 60-day deadline is missed, $4,000 can be contributed as a regular contribution for 2007. The 5498 will show a total contribution of $8,000 for 2007, which means the taxpayer will need to explain to the IRS that $4,000 was removed as a return-of-excess.

I agree with Appleby as long as you can get the trustee to report the removal of the current year's contribution as an excess. If not then as Ricky Ricardo would say "Lucy, you got some splaining to do"

JEVD

Making the complex understandable.

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Guest gzwick26

I did not make contributions yet for 2008. The contributions that I took out were from previous years. Am I correct that I'm still able to make the 2008 contributions up until April of 2009. Am I also correct that the money remaining in the account($900- the earnings from the money I had contributed) will be tax free at age 59 1/2? Thank you.

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anyone?

Yes. If you did not make any 2008 contribution and you are otherwise eligible, then you may make a contribution up until your tax filing deadline for 2008 ( no extensions)

Also, the earnings are generally tax free if the account is open 5 years and you make a qualified withdrawal.

age 59 1/2

Disabled

Expenses related to a First Home ( $ 10,000 Max)

Paid to your beneficiary at your death.

JEVD

Making the complex understandable.

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