Roth IRA distribution

[perry]

Have been reading some posts on Roth IRA's and have a question that I would like feedback on. It has been my understanding that as long as there is no conversion amounts in ANY of the taxpayer's Roth accounts, withdrawals of contributions are tax free and penalty free AT ANY TIME. The only time the 5 year rule comes into play is if there are converted amounts in the Roth or earnings are coming out (contributions always come out first). Was at a seminar about 3 weeks ago where this came up and instructor said any distribution is subject to penalty if 5 year time frame has not been met. I researched this back at office and emailed him on this and he emailed me back again saying 5 year rule must be met on all distributions. I would like to convince tax clients to start retirement accounts (especially Roth) but some are worried about having to leave money in for many years before they can take it out. I would like to tell them that they can always get their contributions out at any time with no tax or penalty to ease their concerns on this. I have a local investment rep that agrees with me on this but another investment rep says 5 year rule applies. From what I am reading it would seem a taxpayer could contribute to a 2011 Roth in March 2012, take the savers credit, if it applies, and then withdraw the Roth in a week and not pay any tax or penalty on it and keep the savers credit. Would appreciate your responses.

[appelman]

You are correct.

Refer your instructor to the first sentence under "Are Distributions Taxable?" on p. 62 of Pub. 590. (Note the "or."):

"You generally do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s)."

Also, on p. 63:

"Other early distributions. Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions."

(Note the words "taxable part.")

[sandigi]

No Credit

You wouldn't get the saver's credit. You would have to reduce the ROTH IRA contribution by the distribution. Not just by this year's distribution, but also by the previous 2 years. See IRS link below and form 8880.


In your example, make a 2011 ROTH contribution in March 2012 and take it out a week later. No credit. You have -0- eligible contributions for 2011.

But what if you file your 2011 return by 04-15-12 and then take your ROTH cont out after the filing deadline?
You would get the Savers credit for 2011. But then this amount would be used to reduce your Savers credit in the next 3 years.

But you might have something here. Although you could not make this an annual planning stragegy, could it be a strategy like 2 year lumping Schedule A? Could you make a ROTH contribution before the filing deadline, take it out after the deadline and do this every 3 years and get the saver's credit? Or would that be every 4 years? I've got to get a pencil here . . .

http://www.irs.gov/uac/Get-Credit-for-Your-Retirement-Savings-Contributions

Below is copied from irs linked site:
"Distributions When figuring this credit, you generally must subtract the amount of distributions you have received from your retirement plans from the contributions you have made. This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date - including extensions - for filing the return for the credit year."

[appelman]

Sandighi is correct about the credit.

No credit if deposited in 2012 and withdrawn "in a week." I missed that bit in the original post. And yes, he could, in principle, withdraw after next April 15, claim the credit in 2012, redeposit in 2016, and repeat the process. But he ain't going to build up much of an IRA that way. The taxpayer would have to decide whether his goal was to save for retirement or to game the savers credit.