Roth ira early withdrawals

[jameschughes]

I've had my Roth Ira for over 5 years now. I am under 59 1/2 and put in $6500 3 years ago. I took out $1400 early withdrawal for personal reasons and am now being taxed 10%. Is this right??? I thought the rule was if the account was open for more than 5 years I would be allowed to withdraw my contributions without penalty? What am I missing here, am I wrong?

[DS30 · Accepted solution]

It depends

For Roth IRAs, you can always withdraw post-tax contributions (also known as "basis") from your Roth IRA without penalty.

When you get to the screen that titled "Enter Prior Year Roth IRA contributions", make sure you are entering the total amount of all your previous Roth contributions. (see screenshot) So if you contributed $20,000 to your Roth IRA in prior years, you will put $20,000 in the amount box on this screen.

You can always withdraw contributions (but not earnings) that you made to your Roth IRA tax and penalty free at anytime. Additionally, the Ordering rules for withdrawals from a Roth IRA are: first from regular contributions, then from Conversion and rollover contributions, on a first-in, first-out basis and finally from Earnings on contributions.

Please note: A qualified distribution from a Roth IRA is tax-free and penalty-free, provided that the five-year aging requirement has been satisfied and one of the following conditions is met:

• Over age 59½
• Death or disability
• Qualified first-time home purchase

A non-qualified distribution is subject to taxation of earnings and a 10% additional tax unless an exception applies. For Roth IRAs, you can always remove post-tax penalty contributions (also known as "basis") from your Roth IRA without penalty.

When you are entering this information into TurboTax, your Form 1099-R, box 7 codes J, Q and T identifies a Roth IRA distribution and determines the tax treatment. If you have a J or a Q, the distribution is considered taxable unless there is an exception. TurboTax will guide you on all the exceptions.

Please refer to this IRS link for more information about Roth IRAs:

https://www.irs.gov/publications/p590b/ch02.html#en_US_2015_publink1000231071

To enter your 1099- R in TurboTax Online or Desktop (you may need to upgrade to report these distributions), please follow these steps:

1. Once you are in your tax return, click on the “Federal Taxes” tab ("Personal" tab in TurboTax Home & Business)
2. Next click on “Wages and Income” ("Personal Income" in TurboTax Home & Business)
3. Next click on "jump to full list" or “I’ll choose what I work on”
4. Scroll down the screen until to come to the section “Retirement Plans and Social Security”
5. Choose "show more", then IRA, 401(k),Pension Plans (1099-R) and follow the onscreen instructions

Please note that all distributions will be reported on your tax return (whether or not they are taxable) on Form 1040 on line 15(a) (or 16(a) but only the taxable portion will show on your return as taxable on line 15(b) (or 16(b)).

To preview 1040:

• Sign into https://myturbotax.intuit.com/
• Under Tax Timeline, click on Continue your return
• Go to "My Account" > "Tools"
• Under the Tools Center, select "view tax summary"
• Select "Preview my 1040"

[dmertz]

Although most of this answer is correct, for a distribution to be a qualified distribution, the distribution must be made after 5 years after the beginning of the year for which you first made a Roth IRA contribution *AND* you must be age 59½ or older (or disabled).  Since the distribution occurred before age 59½, the distribution is not a qualified distribution and the taxability is determined by whether the distribution is more or less than the amount of original contributions.

[Mark3]

If you are under 59 1/2, and do NOT withdraw more than original contributions ("basis"), AND it has been over 5 years since that amount (being withdrawn) was contributed, then you should NOT have ANY penalties (or taxes), withdrawing from a Roth Ira?
"You can always withdraw contributions (but not earnings) that you made to your Roth IRA tax and penalty free at anytime. Additionally, the Ordering rules for withdrawals from a Roth IRA are: first from regular contributions, then from Conversion and rollover contributions, on a first-in, first-out basis and finally from Earnings on contributions."
Someone, in a bank, told me that if I am under 59 1/2, the Withdrawal comes from Earnings FIRST, which means there is a 10% tax penalty and under-age penalty. Which "Ordering Rules" are correct?

[dmertz]

Don't trust bank employees to know IRA regulations.  The ordering rules for withdrawals from a Roth IRA are correctly stated in the answer above (although to clarify,  when referring to "rollover contributions," the answer is referring rollovers other than the rollover of a distribution from a Roth IRA).  See the following from IRS Pub 590-B for confirmation:

<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p590b/ch02.html#en_US_2015_publink1000231071">https://www.irs.gov/p...>

[Mark3]

Thank you. Will look at that link and Try to understand it (;->

[mjdavern33]

Not sure if I'm asking the question the correct way but, I'm having difficulty entering a ROTH distribution.  In early 2018, (prior to April 15th) , my wife and I contributed $13000 each to ROTH IRAs for 2017 & 2018.   Unfortunately, at the end of the year an emergency situation required that I we take almost all the funds back out of the ROTH.  I have received 1099Rs with code J for $11022 & $12512 respectively.  Since these were obviously after tax contributions, we should be able to back the contributions out without tax consequences as I understand it.  However, I can't figure it out on Turbo Tax.  It has the majority of the distribution as taxable.  What am I doing incorrectly? 

[dmertz]

mjdavern33, code J indicates regular distributions, not returns of contributions.  In addition to making sure that you have entered your and your spouse's $6,500 contributions for 2018, be sure to click the Continue button on the Your 1099-R Entries page and confirm that TurboTax shows your and your spouse's contribution basis for years prior to 2018 as $6,500 each (or more if either of you have basis from contributions for years prior to 2017), the amount of each of your $6,500 Roth IRA contributions for 2017.  TurboTax will prepare Form 8606 Part III for each of you showing $13,000 of contribution basis to be subtracted from your respective distributions to make them non taxable.

[mjdavern33]

Many thanks dmertz.  I did see the question for prior year's, but I thought it was referring to calendar years.  Doh!

[ouchrush]

Hi,

I opened my ROTH IRA account in 2015, and I contributed $5500 respectively for 2014 and 2015. I invested all the contribution in different stocks.

Now I want to sell some of the stocks to get $5500 back in cash, and withdraw it. May I do so without any taxes and 10% penalty?

What I don't understand is when I sell the stocks, I'm going to realize some gains. For example, in 2014 I invested $1000 in Apple, and now if I sell all the Apple shares I can get $1500, so there's a $500 gain. However, the $1500 is under my original contribution, $5500 + $5500.

Will the $1500 be considered a $1000 contribution + $500 earning (so the $500 is taxed and penalized)?

Or will it be considered withdrawing from my 2014 contribution?

Also, I have received about $150 dividends & interests over the years. They sit in the money market funds. Therefore, I only need to sell $5350 from my portfolio. 

Will the $150 be considered earning and subject to taxes & 10% penalty?

Or will it be considered withdrawing $150 from my 2014 contribution?

[Critter]

Ok ... stop thinking cap gain in an IRA ... it doesn't matter since they are not treated the same was as a regular brokers account ... only thing to keep track of is the contributions.   If you put in 5500 and then take out 5500 then you have no taxable distribution and no penalty ... that is the beauty of the ROTH IRA.   As long as you don't touch any of the earnings/cap gains above the contributions made all is good. 

[BCL0301]

I am under 591/2.  I have my Roth account for over 5 years and I took some of my contribution out and use it as down payment for my first house.  When I enter federal return, it shows not taxable.  However, when I started my state return, it shows this as income and I have to pay state tax.  Can you please advise if this is correct?  

[JoannaB2]

It depends. Generally, the taxable portion of Roth distribution will be the same for state and federal purposes,   Qualified distributions are excludable from income tax, if you meet the following requirements:

1. Holding period of at least 5 years after first Roth contribution.
2. You have to be at least 59 1/2 on the day of the distribution.
3. Death or disability.

However, your state of residence may have different rules regarding Roth distribution.  Please check with your local state revenue.  

[Longnr00]

I BORROW 25000 TO PAY DOWN PAYMENT ON NEW HOME HOW CAN I DEDUCT TE AMOUNT THIS WAS TO GET OUT OF PAYIN RENT AND HAVE KNOWING BUT RENT RECEITS AND I AM UNDER 59 1/2 AM 52

[JamesG1]

This IRS Publication lists the Exceptions to the !0% Penalty on early distributions.

IRS Publication 590-B Page 24

First home

Even if you are under age 591/2, you don't have to pay the 10% additional tax on up to $10,000 of distributions you receive to buy, build, or rebuild a first home.

After you have entered the 1099-R, you come to the screen Let’s see if we can reduce your early withdrawal penalty, click Continue.

If you qualify for the distribution, the option will be listed at the screen These Situations May Lower Your Tax Bill.