Roth IRA withdraw -- why was I taxed so much?

[Guest cnyc]

Hello,

I recently closed my Roth IRA account (I'm not yet at retirement age.) I had contributed $2000 a couple of years ago and the total was up to $2113. I just got the check today -- and it said that $211 had been subtracted for federal taxes and $110 had been subtracted for fees. I'm confused. I thought that I could withdraw the amount that I contributed ($2000) tax free. I expected to be taxed on the remaining $113 . . . but how can the federal tax on $113 be $211? That doesn't make any sense. Also, what is the $110 in fees?

I'm going to call the company Monday morning -- but I was hoping to find some answers on here first!

Thanks!

[mbozek]

The withholding tax on withdrawals from a deductible IRA is 10% of the taxable distribution which equals $211. This means that either you or the custodian are mistaken as to the type of account that was opened. You need to check your doucments. See IRS pub 590 for details on withdrawals. The fees are goverend by the terms of the investment agreement.

[Appleby]

Roth IRAs are not subject to withholding Code Section §3405(e)(1)(B)…yet some custodians insist on treating it similar to traditional IRAs for withholding purposes.

cnyc , you may have had a Roth IRA with a custodian that applies withholding to Roth IRA distributions…, i.e. 10% if no withholding election is made [$2113 x.1= $211)…which means that you may have failed to male a withholding election. ..Your distribution request form may have included the statement that the withholding rules would apply…

Another apparent error is that the custodian is treating the fee as part of the distribution, as they applied the withholding to the gross amount, instead of the gross less fees.

you may want to check your 1099-R and make sure that the amount is Box 1 does not include the fee of $110.

[John G]

I have two questions. Why did you close the Roth which is a great tax shelter? What kind of investments did you get involved with that only got you about a 5% return over multiple years? Your experience might be instructive for others. If it is not too personal, please expand on your situation.

[Guest cnyc]

Hello! Thank you for all of your reponses. It turns out -- it was a mistake on the form: yes, it was definately a Roth Ira -- the fees were correct, but they took out taxes on the entire amount instead of just the interest. They are reissuing a new check. I guess it pays to question your accountant on occasion!!

To answer your other questions: Simply, my finanical situation has changed. I opened the IRA several years ago because at that time my employer did not have a 401(k) plan. Since then, they have started the 401(k) and I find that much easier to contribute to regularly than the IRA. Plus, my husband's job situation has recently changed and we simply needed the $2000. Since we hadn't contributed and/or earned much -- I knew that closing the account would not be as dramatic as if we had thousands and thousands of dollars in it. I think the Roth IRA is a great thing -- and my husband still has his (his company does not offer a 410(k) plan.) Hope that answers your questions!!

Thanks again for the advice!!

[John G]

Thanks for responding. Sounds like you got the tax issue corrected. The fee for closing is in my opinion excessive - not that you can do much about that.

A suggestion for others thinking of closing there IRA/Roth .... money is on sale right now, you can get a home equity loan, roll a credit card balance into a new account at 0% interest, get a signature line of credit at a very low rate, etc. I would kill a Roth only in truly desperate circumstances.

- - - -

Some points for novice investors... you don't need to swing for the fences (baseball) or look for the dark horse (racing) or bet the farm (agriculture?) to achieve long run success. A well balance equity portfolio will, over many decades, get the job done. Chasing performance.... the hotest mutual fund in the past year, the hotest stock in the past year, the hotest international market... is not a very solid approach to investing.

We just came through 3 ugly years for stock investing, which was then followed by an excellant 12 months. Don't over react to a hot market or a couple of ugly years. Think long term and let time be your friend.

Yes, there are many accounts that are down over the last three years. But a well balanced portfolio did OK, especially if it included some stocks paying dividends.

[WDIK]

bet the farm (agriculture?)

Poker.