Roth full distribution including contributions made the same year

[gxt1]

Working on an extension return (estimated tax already paid).

For 2024 my son-in-law was strapped for cash, got some bad advice and took the small amount of money he had in a Roth out, not understanding he was under 59 1/2 and not only would it become taxable income but be subject to a 10% penalty. This was not a return of excess contributions but a full distribution 1099-R code J.

Not much to do about it, he owes the tax on the mid $3K value of the distribution.

I realized I hadn't entered in the values reported on form 5498 for contributions that were made in 2024 tax year. I did so and it's $241 less tax owed. If I take the amount contributed (to the Roth) for 2024. multiply it by 10% for the amount of penalty that would have been accessed and by 12% for their marginal tax rate I come out at $238, real close to the $241 less tax calculated by TurboTax.

So just to be sure I understand the refund / tax calculations, it looks like if, a non excess removal of contributions that were made in the same tax that a full distribution is taken, the portion of the removal that is attributed to contributions made for the same tax year are not subject to tax or penalty regardless of being under 59 1/2 ?

[Opus 17]

Withdrawal of contributions from a Roth IRA is never taxed at any age or reason for the withdrawal.  Withdrawal of earnings is subject to income tax plus a 10% penalty for early withdrawal if the taxpayer is under age 59-1/2.  

[gxt1]

Withdrawal of earnings is subject to income tax plus a 10% penalty for early withdrawal if the taxpayer is under age 59-1/2.  

Apparently not if the contributions are withdrawn in the same tax year as when they were made, otherwise why would TT calculate a refund after the contributions for the same tax year were entered? 

[gxt1]

I think I've pretty well confirmed this for myself. I found a place that shows the 2024 Roth distribution in TT and the value of the Roth full distribution is exactly the value of the Full distribution minus the amount of the 2024 Roth Contributions made.

[Opus 17]

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@gxt1 wrote:

Withdrawal of earnings is subject to income tax plus a 10% penalty for early withdrawal if the taxpayer is under age 59-1/2.  

Apparently not if the contributions are withdrawn in the same tax year as when they were made, otherwise why would TT calculate a refund after the contributions for the same tax year were entered? 

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I don't know what you are talking about.

Your Roth IRA contributions are normally not reported anywhere on your tax return, unless they were in excess (you were ineligible to contribute).  Turbotax will ask about your Roth contributions for a couple of reasons but that information is not sent to the IRS.

When you withdraw from a Roth IRA, if you just make a regular withdrawal with no special procedures, you will get a 1099-R that should have code "J" in box 7. This indicates an early distribution with no known exception.  After entering the 1099-R, you should continue in the interview (don't skip questions).  You should be asked for the amounts of all prior contributions, and any conversions.  The result goes on box 4a and 4b of form 1040.  For example, if you report a withdrawal of $3500 and prior contributions of $3000, your form 1040 should have $3500 in box 4a (total withdrawals) and $500 in box 4b (taxable withdrawals).  If it is an early distribution, the amount in box 4b should also be found on form 5329, line 1.

As far as a tax refund, that is a simple math problem between the amount of tax owed and the amount collected in withholding and payments, and is considered over the entire tax return.  Any withholding on a withdrawal is only an estimate of what might be owed.  Again, suppose the withdrawal is $3500 and there is 10% withholding or $350.  Only the $500 of earnings is taxable, at 22% the tax plus penalty is $160, so the remaining $190 will come back as a refund. 

[gxt1]

TurboTax as part of the tax reporting process does asks about retirement contributions

     Traditional

     Roth

     None of the Above 

Next Screen it asks if the contribution was a repayment - No

Next Screen the contribution amount. In this case is was $1,084 (for contributions made in 2024).

Next Screen - Switch from Roth to Traditional - No

Next Screen - Withdraw from Roth IRA before 2024? No, no withdrawals before 2024

Next Screen - Enter Prior Year Roth IRA contributions prior to 2024 that remain in the account = 0

   the withdrawal from the account was a full distribution, the account was closed.

Next Screen - Any Roth Conversions - No

Next Screen - Any Excess Roth Contributions - No

As soon as I entered the Roth contribution of $1084 (which was the last item entered, well after the 1099-R for the total distribution) TurboTax reduced the amount of tax owed by $241

On form 8880 it shows the full distribution of $3,528 reduced by the 2024 contributions of $1,084 as the "basis" to leave a taxable value $2,444.

The only conceivable explanation (that I can think of) for TT to do that is; the 2024 Roth contributions were made in the same 2024 tax year as the full distribution and it all happened before the filing date. So the 2024 Roth contributions effectively became reversed and weren't considered part of the taxable distribution, they were subtracted from the distribution.

If there is a better explanation, I'm all ears.