Cashing Out On Roth Ira

[Guest TAM302]

THIS IS KIND OF A TWO PART QUESTION--

IN 2001 I CONVERTED MY TRADITIONAL IRA TO A ROTH IRA AND THE BANK TOOK A 10% TAX OUT. I NEVER DID ANY SPECIAL FORMS WITH MY 1040 THAT YEAR, SHOULD I HAVE?

PART TWO--

IN 2002, I CASHED OUT ALMOST ALL THE ROTH IRA TO HELP PUT MONEY DOWN ON A HOUSE. NOW I'M NOT SURE IF I NEED TO DO A SPECIAL FORM ON MY TAXES THIS YEAR OR JUST COUNT IT AS INCOME. ALSO DOES IT HAVE TO BE REPORTED ON 2002 TAXES OR DO YOU HAVE A COUPLE OF YEARS TO REPORT LIKE YOU CAN ON A 401K.

[John G]

I think you need to take your question to a tax preparer or accountant. You may not be able to accurately explain all the details involved in the transactions you mentioned.

I am surprised that you had withholding on a Roth conversion. If you actually converted regular IRA assets to a Roth, then yes you should have paid taxes last year. Exactly how much would depend upon the details. It sounds like you will need to file a revised 2001 return.

You also need to talk with a tax specialist about the withdrawal for a home purchase.

For the general reader.... don't do these types of transactions without consulting a tax specialist'. The average person does not understand all of the rules and just reading IRS pub 590 may not clear that up either. The cost of making a mistake is far more than buying an hour of professional advice.

(Take the caps lock off)

[Appleby]

Right John…also, IRA holders must be sure to make proper withholding elections when completing Roth IRA conversion requests… because a Roth IRA conversion is technically a distribution and a rollover, the amount leaving the Traditional IRA is treated as a distribution for tax withholding purposes. This means that if the IRA holder does not make a tax withholding election (example elect to have NO taxes withheld), the IRA Custodian/Trustee must withhold 10 percent of the amount being converted for federal taxes. If the Custodian practices withholding for State Tax, these rules would also come into play.