Early Roth withdrawl, what are the penalties?

[Guest soberjedi]

I am 31. I have a Roth with about 25k worth of stocks in it. I want to withdraw 3k from this account. What are the penalties if I do this and how do I do it?

[John Olsen]

The "ordering rules" which govern the taxation of Roth distributions say that withdrawals, whenever taken, are considered to be annual contributions (the money you put in, each year), to the extent of any remaining annual contributions.

Those contributions may be withdrawn at ANY time with no tax or penalty due.

Once you've withdrawn all of your annual contributions, then you get into Conversions, and then the rules get a bit stickier.

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

314-909-8818

[Guest soberjedi]

Ok, thanks, so I have made a total of 6k worth of contributions, the rest is profit I have made from stocks. I am able to withdraw up to that much, without being penalized if I understand you correctly. Then am I able to replace the amount at a later date?

[BPickerCPA]

You have 60 days to replace the amount. After that you cannot replace it. The 60 day rule applies to any money in the account. Even if you took earnings and replaced it within 60 days, there would be no tax. You can only do this once within 12 months.

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Barry Picker, CPA/PFS, CFP

New York, NY

[John G]

"replace it" clarification: you can not stick the lump back unless you act in 60 days as BPicker has said. However, you could if you qualify in the future contribute 2,000 each year again.

You may have alternatives: a tax refund, borrowing against home equity, borrowing on margin against other non-IRA holdings. The benefit of a tax shelter is substantially a function of how much time you keep the funds sheltered. What is easy to do or legal can often be unwise.

[Guest soberjedi]

Ok you guys, thanks for all of your help. One more question.... do I have to replace the whole 3k in one lump sum within 60 days and does it have to be exactly 3k?

Thanks again!!!

[John G]

You can replace all, or part of the amount taken out. Your tax impact, if any, is on the net not returned in 60 days.

Be careful about this kind of transaction. Get everything in writing with date time stamps, and don't wait to the last day. Custodians make mistakes, especially during the tax season rush.

Have you considered asking your boss for a raise, bonus or advance? Just a thought!

[Guest soberjedi]

Thanks John. I believe that I am clear on the subject now and my questions have been answered. Unfortunately, I am a college student who works part time for a restaurant and who makes minimum wage (besides tips). So I think that asking for a raise or an advance is probably out of the question. Thanks again.