Roth IRA withdrawal

[JenMO]

Taxpayer (approx 45 yrs.old) contributed to Roth $2000 in 08, and $2000 in 09. Later in 09, account was considerably less, and he decided to withdraw $2000. He says the account is still open and a little money left. The 1099 came out with a J, which software makes taxable and 10% penalty. TTB on 1 3-5 chart says distributions are tax free when still principal, but on page 14, it talks about the 5yr rule. He also paid education expenses for wife and child. Can and how do I exclude this income?

[jimenright]

Take

a loss on schedule A misc deductions subject to 2% floor. Must first cash out all Roth IRA's. The cash out must result in a loss. See TTB pg 4-24 deduct/non deduct grid.

[JenMO]

I understand about the loss, but what about the taxability of the withdrawal of principal? and the penalty. Do I use the form and put his account balance before the withdrawal? What's the deal about the 5 yr thing? Does that pertain to withdrawals of principal, or distributions from principal and interest?

[Dusty2004]

Not taxable but penalty

The withdrawl will not be taxable for regular income but you will have to pay the penalty for early withdrawl even though they lost money.

Dusty

[JenMO]

Is the penalty because he didn't wait the 5 years to withdraw?

He paid college tuition for son and wife. Can I eliminate the penalty, or is that only for traditional IRA's?

[Gene V]

Roth IRA

I believe none of the withdrawal are taxble.
See Pub. 590


Are Distributions Taxable? page 64

Withdrawals of contributions by due date. If you withdraw
contributions (including any net earnings on the con-
tributions) by the due date of your return for the year in
which you made the contribution, the contributions are
treated as if you never made them. If you have an exten-
sion of time to file your return, you can withdraw the
contributions and earnings by the extended due date. The
withdrawal of contributions is tax free, but you must include
the earnings on the contributions in income for the year in
which you made the contributions.

If you don't think this is your situation--then follow the Ordering Rules for Distributions page 66 and do the worksheet on page 67.

[snowshine]

This year's contributions can always be removed by the due date plus extensions, so no problem there. I think some of us are confused by the 5-year rule as well: rollover contributions and earnings are subject to 10% penalty if removed before 5 years: principal (or basis if you will) can always be removed tax free, regardless of years.