Paying penalties on early distributions of already-taxed Roth IRA contributions

[talespinner]

If my Roth IRA contributions have already been taxed, why am I paying a (tax) penalty each year on early distributions (before age 59 1/2)?  Shouldn't that technically be all my money since I've already given the IRA their portion?

[macuser_22 · Accepted solution]

You can always withdraw your own Roth contributions tax and penalty free.

Enter a 1099-R here:

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

OR Use the "Tools" menu (if online version under My Account) and then "Search Topics" for "1099-R" which will take you to the same place.

Be sure to choose which spouse the 1099-R is for if this is a joint tax return.
Be sure to pick the correct 1099-R type: Standard 1099-R, CSA-1099-R, CSF-1099-R, RRB-1099-R.

[NOTE: When you get to the "Your 1099-R Entries" screen where you can add another 1099-R, use "continue" to keep going as there are additional interview questions after that screen in most cases. You can always return as shown above.]

One of the followup questions will ask for your prior year** contributions not previously withdrawn. Those contributions that still remain in the Roth will not be taxed or subject to a early withdrawal penalty. That will add a 8606 form to your tax return with the Roth contribution and tax calculation in part III.

Note: **Prior year - any current year Roth contributions should be entered into the IRA contributions section. They will not show up in the prior years contributions but will be accounted for on the 8606 form that calculates the taxable amount.

[talespinner]

Thank you, that's a lot of info. 🙂  To boil it down, am I still obligated to pay an early distribution penalty since I'm not 59 and 1/2 years old yet?  Does that penalty even have anything to do with my contributions having been taxed in advance?  I just know that if I took out (early distributions) more than I contributed over a period of time, it seems I owe a hefty chunk to the IRS, and I'm trying to see if that's mandatory or if I'm just toggling the wrong button or filling in info I don't have to in Turbo Tax.  I appreciate your help.

[macuser_22]

---

@talespinner wrote:

Thank you, that's a lot of info. 🙂  To boil it down, am I still obligated to pay an early distribution penalty since I'm not 59 and 1/2 years old yet?  Does that penalty even have anything to do with my contributions having been taxed in advance?  I just know that if I took out (early distributions) more than I contributed over a period of time, it seems I owe a hefty chunk to the IRS, and I'm trying to see if that's mandatory or if I'm just toggling the wrong button or filling in info I don't have to in Turbo Tax.  I appreciate your help.

---

As I posted, there is NO penalty for withdrawing yiur own past Roth contributions - only withdrawing earnings is subject to the penalty.

[talespinner]

Ahh, that explains why Turbo Tax asks how much I've contributed from the Roth IRA's inception, and how much I've taken out (early) up through the previous year...if I'm remembering correctly.  I guess there's no way around that.

[macuser_22]

Why would you want to "get around" that?    You don't want to pay tax do you?

[talespinner]

I only meant that there's no way of getting around paying the penalty for early distribution.  It proves that it pays to leave that money alone until retirement (or at least 59 and 1/2).

[macuser_22]

---

@talespinner wrote:

I only meant that there's no way of getting around paying the penalty for early distribution.  It proves that it pays to leave that money alone until retirement (or at least 59 and 1/2).

---

If you only withdrew your own contributions then there is no early distribution penalty.    The penalty only applies to earnings that are distributed before 59 1/2.    As I said above you can remove your own contributions at any time tax and penalty free.