Roth IRA Contribution Basis Withdrawal

[joetyyang]

Hello,

I have a question about Roth IRA early withdrawals. I am asking this for a family members situation:

- First opened a Roth IRA account and deposited $100 for the year 2022.

- Received the fidelity $100 bonus (labeled as earnings)

- Transferred the money out of the roth ira of $200 (mistake i know)

- Later, contributed $50 for the year of 2023.

I know that they are subjected to early withdrawal penalty and taxes. When they later file for taxes, it will ask on form 8606 line 22 for the basis in Roth IRA contributions.

What would the Roth IRA contribution basis be? I am assuming the basis would be $100 since they took it out before putting in the $50 later. Which would mean they would pay the penalty and taxes on the $100 from earnings. ($100(contribution)+$100(earnings)=$200)

Would the Roth IRA contribution basis be $100 or $150?

[dmertz · Accepted solution]

Since you mention Form 8606, I assume that your Roth IRA distribution is a nonqualified distribution.  Assuming that the distribution occurred in 2023, the Roth IRA contribution basis on line 22 of your 2023 tax return would be $150.  If you are eligible and contribute another $50 before the end of 2023, your basis will be $200 and your $200 distribution will be free of tax and penalty, no earnings distributed.  For the purpose of determining the taxable amount of distributions, the distributions are treated as occurring on December 31 of the year in which the distributions occur.

If it has been less than 60 days since your $200 Roth IRA distribution, you can roll over some or all of that distribution.  However, that would be subject to the one-rollover-per-12-months limitation, so if your funds are limited and you would not be maxing out your 2023 contribution limit, new contributions would probably be better than doing the rollover.

[joetyyang]

Wow, this was very informative and helpful. Thank you!

So if another $50 was contributed to the account (yes eligible), it would be like the earnings aren't taken out, correct? Since the contribution basis would be $200. Sorry, new to this, I did not know that distributions were treated as occurring on December 31st. This answers my question because the distribution did occur in 2023.

[dmertz]

Correct.  With $50 more contributed in 2023 (before the end of the year), the amount on line 22 of your 2023 Form 8606 will be $200.

[joetyyang]

Thank you so much, you are great!

I just have one more question if you don't mind. Would the contribution basis reduce due to the withdrawal? What I mean is for the future years, let's say I contributed another $100. Would the contribution basis now be $300 or would the withdrawal cause the basis to reduce to $200? The basis doesn't change from withdrawals right?

[dmertz]

The basis is reduced by distributions.  Contribution basis comes out first, followed by conversion basis (if any) and finally earnings.

If you contribute another $50 before the end of 2023, your $200 distribution will be a distribution that consists of your entire $200 of contribution basis, leaving $0 of contribution basis in your Roth IRA(s).  Everything left in your Roth IRA(s) will be earnings until you contribute more.

[joetyyang]

Thank you, you have help me tons.

I couldn't find any clear answers online or the people that I have asked. So I appreciate it alot.

[mattroz87]

Hi there, I just found this thread and I have a similar situation but the only thing I'm still stuck on is what to select on 4b drop down for cost basis distributions (ROLLOVER, QCD, HFD or just leave it blank)?

I withdrew my cost basis (amount exact to the penny) from Roth IRA in 2023. I previously rolled over my Roth 401k to Roth IRA in 2020 (2020 1099-R rollover cost basis matches what I took out in 2023, Code H so no tax was owed on that transaction) and never touched that account until 2023.

My 2023 1099-R from Wells Fargo has code J and "Taxable amount not determined". I'm trying to use Form 8606 to calculate taxable amount and it comes up to be 0.00 after inputting that cost basis matching the distribution.

[AnnetteB6]

If your distribution from the Roth IRA exactly matches the cost basis in the account, then there is no tax consequence of the distribution.  

The cost basis is the amount of after tax contributions that were made to the Roth IRA.  When those after tax contributions are distributed, there is no income tax or early distribution penalty owed.

I'm not sure about the first part of your question.  Can you please tell me more about where you are in the program seeing '4b drop down for cost basis distributions' if you still need help with that question.

@mattroz87 

[mattroz87]

There's no dropdown in a program but for some reason it defaults to ROLLOVER option when previewing 1040 form. I'm just wondering if that can be left like this.

[AnnetteB6]

No, ROLLOVER should not be printed on your Form 1040 if you are trying to report a distribution from a Roth IRA.  

Go back to the Form 1099-R section and double-check your inputs.  Be sure that if the 'IRA' box was checked on your Form 1099-R that you also checked that box in TurboTax.  Then be sure that the follow-up questions are also accurate.  

@mattroz87