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Loss on unqualified Roth Distribution


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Participant under age 591/2 and Roth 401k started in 2016.  Wants to take a $13,000 distribution from her Roth 401k account at this time.  Total contributions to the Roth = 21,896.36 and there is currently an overall  loss on the Roth account of $998.15 - i.e. her balance is only $20,898.21.  How does her 1099-R get set up to account for the loss on the Roth money?  I don't see how anything is taxable to her on the $13,000 distribution since she has taken a loss on the account.  Is that correct?

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Based on your description, it would appear that all consists of previously taxed basis, so would be no tax when comes out.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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On ‎4‎/‎15‎/‎2019 at 9:02 AM, Becky Schwing said:

Participant under age 591/2 and Roth 401k started in 2016.  Wants to take a $13,000 distribution from her Roth 401k account at this time.  Total contributions to the Roth = 21,896.36 and there is currently an overall  loss on the Roth account of $998.15 - i.e. her balance is only $20,898.21.  How does her 1099-R get set up to account for the loss on the Roth money?  I don't see how anything is taxable to her on the $13,000 distribution since she has taken a loss on the account.  Is that correct?

The way a roth account works is that you pay taxes on the money when it goes in (because it is income when you earn it, and there is no deduction or exclusion to change that fact), and you don't have to pay taxes on the gain when it comes out.  That's a big tax advantage.  It's better than tax-deferral -- you never have to pay taxes at all on the subsequent income that you earn when your money grows in the stock market.  

By contrast, with a non-roth account, you get a tax deduction when the money goes in.  Essentially, that money doesn't get taxed as income even though you earned it and have a right to it.  Additionally, the further income from growth in the stock market is tax-deferred, which is an advantage because of the time-value of money.  When you eventually get the money, you have to pay taxes on the growth.  

If the account were a non-roth account, then the participant would have to take the amounts distributed into account as income.  Since it is a roth account, the participant doesn't.  Certain penalty and withholding taxes may apply, given that the participant is taking an early distribution. 

Nothing contained herein is legal or professional advice, given that I am a stranger on the internet who has not discussed the details of the situation with you. 

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2 hours ago, AKowalski said:

you don't have to pay taxes on the gain when it comes out

Only if the distribution is a qualified distribution, meaning that is it made after both a) the end of the 5-year period beginning on the first day of the year of the first Roth contribution, and b) the employee attains age 59-1/2.

2 hours ago, AKowalski said:

It's better than tax-deferral

This is debatable.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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