Question on early withdrawl

[Guest summerdreams]

:confused:

We just liquidated our IRA to pay off some high interest credit card debt. But we have a question concerning our taxes. We have contributed more than we are getting back, because the IRA is not earning. Thus we have no earnings to tax. (We had them withold the 10% penalty.) Does this mean we get away without paying any further taxes on this money, since we were losing and not gaining?

Any information you can give us would be great! The fund is Marsico if that helps in any way. MFOCX

[JanetM]

If these were deductible contributions going into IRA - you have no tax basis. 100% of the money that came out is taxable.

[papogi]

You don't specify if this is a traditional IRA or a Roth IRA, but my guess is that it is a traditional IRA. I will first go with that assumption. I will also assume that the traditional IRA was made entirely of deductible contributions. Let me know if any of this is incorrect. You will owe the 10% penalty, and income tax on the total amount liquidated. You have paid the 10%, but you will still owe income tax on the total. Unfortunately, you will not be able to deduct the loss you had, either. If your traditional IRA was made entirely of deductible contributions, your basis was zero, there would be no deductible loss.

For a Roth IRA, money originally contributed as yearly contributions can be taken out anytime without penalty, and with no tax since Roth IRA's are comprised of taxed dollars. Only earnings would be taxed and penalized, and you have none. If it was a Roth IRA you had, the 10% you had withheld should be returned after you file your 2002 taxes. As far as deducting the loss, assuming this is the only Roth IRA you had, the loss is the difference between your basis (total contributions) and the liquidation amount. Whatever your loss, it is only deductible to the extent that it exceeds 2% of your Adjusted Gross Income, and is reportable as a miscellaneous itemized deduction on Schedule A (not Schedule D).

[Guest summerdreams]

I'm sorry, I should have specified, it is a Roth IRA, with only $5900.00 in it. Our contributions were $6400.00.

[papogi]

Your $5900 liquidation amount should go to you tax free. This amount is less than your contributions, so it can be labelled contribution amounts. The 10% penalty withheld should be added into the total of line 59 on your 2002 Form 1040, and will be returned to you. Perhaps you could lower your withholding on your paychecks for the rest of 2002 to help even things out. Just remember to raise it back to normal again for January 2003.

As for your loss of $500, if your adjusted gross income (AGI) is $25,000 or greater, you can't deduct any of the loss.