Roth IRA Contribution Withdraws

[destinx]

I am using the Desktop version of Turbo Tax and am going through the section where I list the information for my 1099R.  I have a Roth IRA and I am only withdrawing the contributions.  The Vanguard website states:

"Withdrawals before age 59½:

Withdrawals of Roth IRA contributions are always both tax-free and penalty-free. But if you’re under age 59½ and your withdrawal dips into your earnings—in other words, if you withdraw more than you've contributed in total—you could be subject to both taxes and penalties on the earnings portion of the withdrawal."

Link: https://investor.vanguard.com/ira/ira-distribution-rules?cmpgn=INT:DP:RIG:PLANWITH:1216:RPM10CK:RPM1...

But when I use Turbo Tax there is no way for me to avoid the 10% penalty.  It also treats the entire withdrawal as if I need to pay taxes on it again!  This is clearly wrong and the questions never ask me how much Roth IRA contributions I have made.  Please provide guidance on how I can resolve this issue.  I am only withdrawing my contributions and it should be completely penalty free but Turbo Tax thinks I owe 10%.

-Thanks,

-Destinx

[KrisD15]

To avoid the penalty, you must hold the account for at least five years and/or have an exception for the early withdrawal penalty. 

Tax and penalty on Roth Withdrawal

[destinx]

-@KrisD15

According to Vanguard's website:

https://investor.vanguard.com/ira/ira-distribution-rules?cmpgn=INT:DP:RIG:PLANWITH:1216:RPM10CK:RPM1...

"Guidelines for withdrawals Withdrawals before age 59½

Withdrawals of Roth IRA contributions are always both tax-free and penalty-free. But if you’re under age 59½ and your withdrawal dips into your earnings—in other words, if you withdraw more than you've contributed in total—you could be subject to both taxes and penalties on the earnings portion of the withdrawal.

Withdrawals of your traditional IRA contributions before age 59½ will result in a 10% federal penalty tax plus regular income tax on the taxable amount of your withdrawal—generally the entire amount—unless you qualify for an exception."

Since I am only withdrawing the contributions on my Roth IRA I should be able to get them both tax-free and penalty-free.  Am I misunderstanding something?

-Thanks,

- Destinx

[AnnetteB6 · Accepted solution]

You are understanding it correctly.  If you are only withdrawing your original contributions to the Roth IRA, then there is no penalty or tax owed.  

The problem is that you have not entered the basis of the Roth IRA in order to get the proper tax treatment of your distribution.  

Use the information below to do so:

• On the top row of the TurboTax online screen, click on Search (or for CD/downloaded TurboTax locate the search box in the upper right corner)
• This opens a box where you can type in “Roth IRA” (be sure to enter exactly as shown here) and click the magnifying glass (or for CD/downloaded TurboTax, click Find)
• The search results will give you an option to “Jump to Roth IRA”
• Click on the blue “Jump to Roth IRA” link

This will bring you to a screen with check boxes to indicate what types of account you had in 2019.  Be sure that Roth IRA is checked.  Click Continue. 

If Traditional IRA is checked or if you have a spouse that had either type of account, the next questions will not pertain to your Roth IRA.  Continue through this section until you are asked whether you made any contributions to your Roth IRA for 2019.  This is the beginning of the section where you will enter details about your Roth IRA, including the basis.

Continue answering the questions according to your situation.  On the screen where you see Let Us Track Your Roth IRA Basis, click Yes. 

Then, on the screen titled Enter Prior Year Roth IRA Contributions, this is asking for your total contributions for years prior to 2019 (basis).  If your basis exceeds your distribution, then the distribution will not be taxable.  If the distribution exceeds your basis, then the excess will be taxable.

Finish the rest of the follow-up questions about your Roth IRA. 

You may need to go back through the Form 1099-R section showing your withdrawal to be sure the follow-up questions are completed properly.

[mccart30]

It is still taxing my contributions when I do this.

[DaveF1006]

Your Roth IRA withdrawals may be taxable if: you've not met the 5-year rule for opening the Roth and you are under age 59 1/2:

You will pay income taxes and a 10% penalty tax on earnings that you withdraw. The 10% penalty may be waived if you meet one of the eight exceptions to the early withdrawal penalty tax.

Have you entered an exception for the 10% penalty?  Also check to see if you accidentally may have indicated that this is a traditional and not a Roth IRA.  

If this doesn't work, you may wish to contact a specialist that can work through that section of the return with you. The specialists can look at your return on their screen to find out exactly what is causing this issue and take corrective action if needed.

[floresga7]

Thank for this great answer. I have one more thing to add. What if you withdrew contributions but it was in March and you also withdrew from the contributions that you made in January, February, and early March. How do I tell the system that that was contribution money since the software asks for prior-year contributions only? 

Thanks! 

[DaveF1006]

To clarify, were these excess contributions you withdrew or were these normal contributions where you had a change of heart?

@floresga7

[floresga7]

These were normal contributions. 

[DanaB27]

If you made a Roth contribution for 2021 and then later withdrew these contributions you will still enter the contribution in the IRA contribution section. Then TurboTax will add this contribution to your prior year's contributions.

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”

@floresga7

[cole21771]

> Then, on the screen titled Enter Prior Year Roth IRA Contributions, this is asking for your total contributions for years prior to 2019 (basis).  If your basis exceeds your distribution, then the distribution will not be taxable.  If the distribution exceeds your basis, then the excess will be taxable.

This is wrong because it doesn't account for money that you had contributed this year. Ex- My prior years contributions are $2000, but this year I contributed $6000 and withdrew $6000. So according to your logic, I should pay a penalty on the $6000 even though I only withdrew what I contributed. I can't get turbotax online to realize this unless I lie to it or remove documents and I don't know what to do anymore...

[DanaB27]

Please make sure you enter your 2022 Roth contribution first then TurboTax will correctly calculate the withdrawal as non-taxable.

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA” and enter your $6,000 contribution.

Then enter your Form 1099-R and answer the follow-up questions:

1. Login to your TurboTax Account 
2. Click on "Search" on the top and type “1099-R” 
3. Click on “Jump to 1099-R” and enter all your 1099-Rs
4. Click "Continue" on the "Review your 1099-R info" screen
5. Answer all the questions and make sure you enter the net contributions prior to 2021 on the "Enter Prior Year Roth IRA Contributions" screen
6. Answer the remaining question.

@cole21771

[cole21771]

Just tried that again step by step and it still thinks I need to pay a 10% early withdrawal penalty

[RobertB4444]

Check to make sure the code on your form 1099-R in box 7 has a B in it.  It should be 1B.  If it is just a '1' then it was coded as an early withdrawal in error when it was issued and that can't be corrected by TurboTax - that needs to be corrected by the folks who issued you the 1099-R.

@cole21771 

[cole21771]

My 1099-R has 8J in it which according to my searching correctly indicates a return of a contribution.

https://ttlc.intuit.com/community/retirement/discussion/turbo-tax-considers-the-8j-in-box-7-as-early...