Roth IRA's 100% double taxation - Beware the IRS

[Guest herbsleather]

The IRS will tax @ 100% all qualified distributions. I had a small Roth I closed in 2002. This was a qualified distribution. The 1099 has a distribution code of T (exception - not taxable). The IRS has informed me the entire distribution amount is taxable. The IRS has also informed me that they will not discuss the matter untill all taxes, penalities and intrest are paid. At that time, I have the right to engage an attorney to attempt to have the monies returned. Since all the money was paid in after taxes, this is double taxation and nulifies any advantage of the so called tax savings. :angry:

[david rigby]

Have you reviewed this? http://www.irs.gov/pub/irs-pdf/p590.pdf

Call 1-800-TAX-FORM to have the IRS send you a copy.

[John G]

Your post is confusing. If you were legally eligible to open a Roth and make contributions, then IRS code allows you to remove the original contribution without penalty. Either you have not posted the entire set of facts, or someone at the IRS has not been properly trained.

Can you clarify the facts? For example, was this Roth based upon annual contributions or was it a conversion from an IRA? If it was based upon contributions, did you adjusted gross income and filing status enable you to make contributions. What were the cummulative contributions and what was the account value when closed. If this Roth was created by a conversion, were the taxes paid on the conversion? How did the IRS "inform" you? Was it just a boiler plate letter or did you have other communications? Does it have a standard code or can you quote specific language. For example, if it was just a standard letter than your problem could be just that someone miscoded the transaction. Unfortunately that happens too often. I am also curious why you would be closing in 2002 as Roths only existed since 1998.

There is no reason to post a blanket warning about "double taxation" on this message board. I can't think of any normal circumstances where that would occur.

Post again and lets see if the tax professionals can help.

[Guest herbsleather]

The Roth was based on monthly contributions. It was closed because 1 1/2 years of unemployment had depleted my other resources. It was not a conversion.

The gross income and filing status were correct and well within the IRS guidelines. The closing value was $2555, all of which was contributions. I forfeit all gains.

It was set up and maintained by an accounting firm.

The original notice fron the IRS is a CP2000. The accounting firm has called the IRS and was told that all contributions are taxable again on withdrawal.

I apologize if my language is incorrect. I allowed my anger to rule.

Herb

[John G]

Thank you for the additional details and I hope things look better in the future on employment.

Something does not add up between your explaination and the IRS response.

My best take on your circumstances about your Roth: If you put $2555 or more in contributions and that none of that amount is subsequent earnings, then you should be paying no taxes. If your actual string of contributions was less than $2555, then you would pay no taxes on the amount that was contributions, but would owe taxes on the amount above the total contributions. If you contributed more than $2555 and the account value at close is less than what you contributed, there is a possibility that you could get a tax deduction for the loss .... but that is not a simple process and you would probably need to as your tax preparer to handle it for you.

However, I do have some questions based upon the language you used that makes me wonder if we are really talking about a Roth. First, you comment "I forfeit all gains" which is puzzling. If the gains were in a Roth, why would you forfeit them? Second, you said this Roth was set up and maintained by the accounting firm. Most folks set up their own Roths and make their own contributions. Are you sure you are not talking about some other kind of retirement plan? Exactly who is the custodian? Please explain how contributions were made to the Roth. Some possible ways: check written by you, automatic deduction from your bank account , somehow funded by your employer or did your accounting firm send in the money?

Jargon can be a terrible barrier in communication. The world of Roths has its own language and the average consumer has normally no reason to master the terminology.

[JAMES PATRICK]

Since it appears that herb contributed to an IRA when he had no earned income the excess contribution had to be withdrawn by the due date of the year in which the contribution was made. I am assuming the contribution was over $2000.

If you look at page 48 in Pub 590 you will see that ALL the withdrawal should be included as gross income.

It has always been my reading of this section that this was the IRS way of letting individuals who tried to "game" the system by overcontributing or by making ineligible conversions that the penalty was going to be more than 6% a year.

In classes I have taught on IRA's I have always warned against this and have been suprised others haven't spoken about the penalties.

If you think about it there is a logic to this position ( I know, I know -- logic --taxes--???) if the contribution/conversion was ineligible than there is NO basis and withdrawals should therefore be taxable.

[mbozek]

The penalites on P 48 apply to excess contributions to a deductible IRA. The penalty for excess contributions to a Roth IRA on P 58 is the 6% excise tax until the payment is removed. There is no income taxation on the contribution which is made on an after tax basis. The IRS can only collect taxes which are permitted under the IRC - so I would appreciate a cite for income taxation of excess Roth contributions.

[Appleby]

Since it appears that herb contributed to an IRA when he had no earned income the excess contribution had to be withdrawn by the due date of the year in which the contribution was made. I am assuming the contribution was over $2000.

If you look at page 48 in Pub 590 you will see that ALL the withdrawal should be included as gross income.

It has always been my reading of this section that this was the IRS way of letting individuals who tried to "game" the system by overcontributing or by making ineligible conversions that the penalty was going to be more than 6% a year.

In classes I have taught on IRA's I have always warned against this and have been suprised others haven't spoken about the penalties.

If you think about it there is a logic to this position ( I know, I know -- logic --taxes--???) if the contribution/conversion was ineligible than there is NO basis and withdrawals should therefore be taxable.

James,

I agree with MBozek,

Roth IRA excess contributions removed after the deadline are treated as regular Roth IRA distributions, which means that the amount is tax- and penalty-free. This is true regardless of the amount.

For Roth IRAs, excess contributions not removed by the deadline are automatically designated as a contribution for the next year…with the 6-percent penalty applying.

Also the $2,000 you mention in your comment “I am assuming the contribution was over $2000.”, wouldn’t this be increased to the contribution limit for the year ( $3,000/$3,500). I think the $2,000 limit applies to years before 20012