Backstory:
I had a personal Roth IRA for over five years, to which I regularly contributed. In October 2024, I closed the account and took an early distribution, assuming I would only have to pay the early withdrawal penalty. I used the funds to cover medical bills (surgeries) and some debt.
Fast forward to tax season: I received my 1099-R and entered the details into TurboTax. Initially, my tax liability was $1,600, but after inputting the Roth IRA distribution, it jumped to over $12,000.
TurboTax asked whether the account had been open for over five years, to which I answered "yes." I also noted that part of the distribution was used for medical expenses. At one point, the software indicated the distribution wasn’t taxable. However, on the final overview page, it added the distribution amount to my total yearly income and is calculating my taxes based on that.
I had assumed (mistakenly, it seems) that since I contributed after-tax dollars to the Roth IRA, I wouldn’t be taxed again on the principal amount, aside from the expected early withdrawal penalty. Can someone clarify if this outcome seems correct?
How much did you contribute to the Roth over time and how much did you withdraw?
You always withdraw in the order contributions first, conversions second, and earnings last. Withdrawal of contributions is tax-free but withdrawal of earnings is subject to income tax plus a 10% penalty if you are under age 59-1/2.
Turbotax does not know the amount of contributions you made over the years, you have to give that information. You should be asked when entering the 1099-R how much you contributed in the past and how much you have withdrawn in the past, so the program can determine the taxable earnings. You made need to re-run the interview or delete the 1099-R and enter it again, to provide the required information.
How much did you contribute to the Roth over time and how much did you withdraw?
You always withdraw in the order contributions first, conversions second, and earnings last. Withdrawal of contributions is tax-free but withdrawal of earnings is subject to income tax plus a 10% penalty if you are under age 59-1/2.
Turbotax does not know the amount of contributions you made over the years, you have to give that information. You should be asked when entering the 1099-R how much you contributed in the past and how much you have withdrawn in the past, so the program can determine the taxable earnings. You made need to re-run the interview or delete the 1099-R and enter it again, to provide the required information.
Your response guided me to the right part of my issue. While reviewing the field asking about my contributions, I realized my mistake—I had misunderstood it as asking for last year's contributions instead of the total contributions. I can breathe a sigh of relief now! Thank you for your quick and helpful response!