Roth IRA withdrawals with annual tax implications
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Level 2

Roth IRA withdrawals with annual tax implications

Okay, this is my question.

If you cash out some portion of your Roth IRA funds, you don't pay the taxes, right?

Now, does the withdrawn money count as my income, so do I have to add it to my annual income and pay the tax or not? 

12 Replies
Level 15

Roth IRA withdrawals with annual tax implications

Depends.    You can always withdraw your own prior contributions anytime tax free but if you withdraw any earnings then:

 

if you are over age 59 1/2 then the earnings are also tax free unless you have not had a Roth IRA for at least 5 years then the earnings can be taxable if withdrawn.

 

If under age 59 1/2 then the earnings are taxable and also subject to an additional 10% early distribution penalty.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
Level 15

Roth IRA withdrawals with annual tax implications

Also be aware, if you have an after-tax 401(k) ("Roth 401(k)") that is not the same as an IRA and the rules are different.  You generally can't withdraw any funds if you are still working for the company sponsor, even if you have had the account more than 5 years.  And there may be other differences.  But money withdrawn in retirement is not taxable income. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Level 3

Roth IRA withdrawals with annual tax implications

Got it. 

I don't work for the company anymore.

So, my ROTH IRA has nothing to do with the company. 

Level 15

Roth IRA withdrawals with annual tax implications


@cspyon1 wrote:

Got it. 

I don't work for the company anymore.

So, my ROTH IRA has nothing to do with the company. 


I don't know why you are mentioning Roth IRA and "company" in the same sentence, so I'm concerned that one of us may be confused or miscommunication.

 

If your company opens a retirement plan for you, it might be a 401(k), 403(b), 401(a), or some other kind of qualified retirement plan, but it is not and never will be a Roth IRA.  An IRA is an "individual" retirement arrangement, not sponsored by a company.  You would go to your own broker to set one up.  If you have a company plan, you can usually roll over or transfer the money into a private plan, but a company plan does not "turn into" a private plan when you leave the company.   

 

The rules on withdrawing money from a private Roth IRA are fairly simple; you can withdrawn contributions tax-free at any time.  Withdrawal of earnings is tax-free only if you are both (a) over age 59-1/2, and (b) the Roth IRA has been open at least 5 years.

 

The rules on withdrawing or removing money from a company plan are different. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Level 2

Roth IRA withdrawals with annual tax implications

Oh, it's my own Roth IRA! But I've got some other traditional IRAs sponsored by my previous company, including the annunity plan that I already mentioned. 

Level 15

Roth IRA withdrawals with annual tax implications


@cspyon wrote:

Oh, it's my own Roth IRA! But I've got some other traditional IRAs sponsored by my previous company, including the annunity plan that I already mentioned. 


I think that you are confused.      Companies DO NOT sponsor Traditional IRA's (IRA's are Individual Retirement Plans that you hold in a financial institutions and has nothing whatsoever to do with an employer or employers plan.    Employers sponsor  plans such as 401(k)'s   (that can be rolled into an IRA when leaving employment  but that becomes your own IRA  at that point).

 

Also I don't see that you mentioned company annuity,  but a company annuity that pays a periodic payment (such as each month) is a pension which is totally different.

 

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
Level 15

Roth IRA withdrawals with annual tax implications


@cspyon wrote:

Oh, it's my own Roth IRA! But I've got some other traditional IRAs sponsored by my previous company, including the annunity plan that I already mentioned. 


As long as the original question "If you cash out some portion of your Roth IRA funds, you don't pay the taxes, right?" pertains to a private Roth IRA, and you only withdraw your principle contributions, the withdrawal is not taxable.  You will get a 1099-R form that you must report on your tax form but you won't owe taxes.  

 

As I said before, work-sponsored accounts are never "IRAs"--they can be other kinds of accounts that are similar in purpose to IRAs, but they are covered by different sections of the Tax Code and the rules for withdrawals are different.  Before you plan to withdraw, convert or rollover any money from a work-sponsored retirement account, make sure you clarify what kind of account it is so you can understand how those different rules might apply to you. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Level 3

Roth IRA withdrawals with annual tax implications

Thanks for correcting me. I double checked my retirement plan sponsored by ny previous company. It's not traditional IRA as you mentioned. I think it's 401k or 402k, I'm not sure.

 

Level 3

Roth IRA withdrawals with annual tax implications

By the way, back to my topic, does ROTH IRA money counts as your income when withdrawn?

I guess not, but want to double check. 

Level 15

Roth IRA withdrawals with annual tax implications


@cspyon1 wrote:

Thanks for correcting me. I double checked my retirement plan sponsored by ny previous company. It's not traditional IRA as you mentioned. I think it's 401k or 402k, I'm not sure.

 


Probably a 401(k).  It's not really important as long as you plan to leave the money alone.  Once you start thinking about moving it around, you need to be careful.  Cheers.  

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Level 15

Roth IRA withdrawals with annual tax implications


@cspyon1 wrote:

By the way, back to my topic, does ROTH IRA money counts as your income when withdrawn?

I guess not, but want to double check. 


If you only withdraw contributions, it's not taxable income and is not "income" on your tax return.  You will get a 1099-R form that you have to report on your return but it does not go as income.

 

If you withdraw MORE than you originally contributed (your gains or earnings) that is:

1. Taxable income if you are under age 59-1/2 or the Roth IRA was open less than 5 years.

2. Not taxable income if you are over ager 59-1/2 AND the Roth IRA is at least 5 years old.

 

For example, I started a Roth IRA last year and so far I have contributed $12,000.  The account is currently worth $13,000.  If I withdraw $12,000 or less, it is not taxable income and not income on my tax return.  If I withdrew the entire amount, then $1,000 would be taxable income because I am not age 59-1/2 and the account is less than 5 years old. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Level 3

Roth IRA withdrawals with annual tax implications

Very clear! Thanks.

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