Taxable portion of non-qualified Roth distribution

[Guest grecb1]

In 1998 I rolled over $9468 from a 401k plan into a Roth IRA. I have paid no tax on the rollover. This year I took a partial distribution (6666.67) from the Roth IRA for the purchase of my first home. What is the taxable portion of this (non-qualified) distribution?

[Appleby]

Originally posted by grecb1

In 1998 I rolled over $9468 from a 401k plan into a Roth IRA. I have paid no tax on the rollover. This year I took a partial distribution (6666.67) from the Roth IRA for the purchase of my first home. What is the taxable portion of this (non-qualified) distribution?

grecb1,

If I understand you correctly,and I think I do as your statement seems very clear...You have a much bigger problem here. The IRS has stated explicitly that assets must NOT be rolled from a qualified plan ( including a 401(k) plan ) to a Roth IRA. The assets should have first been rolled to a traditional IRA and then rolled to a Roth IRA.

What you now have in your Roth IRA is an excess from 1998, which you have not corrected three years later.

For every year that the excess remains in the IRA, you owe the IRS 6% of the excess amount, i.e. $568.08 for each year.

In addition, you owe the IRS income taxes on the $9468 from 1998 tax year.

You must correct this immediately- make sure you talk this over with your CPA

[Guest grecb1]

I did roll the amount first to a traditional IRA and then into a Roth IRA in the 60-day allotted time period. My tax-person told me that I did not have to pay tax on the rollover. In fact, the first year I did the taxes myself paying the taxes I thought I owed on the rollover (spread over 4 years) and received a corrected statement from the IRS and a refund back. That's what caused me to take my taxes to a professional last year.

[Appleby]

Good- I am glad you did- no need to pay money to the IRS unnecessarily

Now to answer your question

You should have paid taxes on the amount you converted to the Roth IRA, as amounts in Roth IRAs are after tax /non-deductible amounts. Individuals had the option to spread the taxes over four years by making that election on their Form 1040. If you received a refund from the IRA it ould be due to other factors, for example, if you elected to spread the taxes over four years and still paid the full amount, the IRS would hve refuned the excess amount paid. Review your return carefully, and check to see if you made the four year election. You may also want to haev you CPA review your 1998 and 1999 tax return and paying special attention to the Roth transaction... But let me adress your specific question, i.e. that of taxability of the distribution from the Roth IRA. The amount you distributed from the Roth IRA is tax free. In addition, because you took the funds for a first time home purchase, the 10% pre-mature penalty that you would pay if you are under the age of 59 1/2, is waived. Up to $10,000 for a first time home purchase is an exception to the 10% early withdrawal penalty.

You will not be paying taxes on any withdrawal from the Roth until you withdraw in excess ( accumulated withdrawal totals) of the $9,468. And even then, the amount will not be subjected to tax if you have had the Roth IRA for five years. The amount in excess of this amount may also be subjected to the 10% penalty if no exception to the penalty applies at the time of withdrawal