Roth ira

[AccTaxMan]

Is it correct to say that if the withdrawal from a ROTH IRA is your own contribution, there is no tax or penalty under any circumstances?

For example, you are 35 years old. You open a ROTH IRA today and put in $5,000. You take the $5,000 out tomorrow. No tax and no penalty, correct?

[Koss]

Roth Distribution

You are correct. The early distribution penalty, and regular income tax, are applicable only to any earnings.

BMK

[Koss]

However...

The IRS has warned against abusive transactions in which a contribution to a Roth IRA is made for the sole purpose of claiming the Retirement Savings Credit, and then immediately withdrawn.

I have not heard of any aggressive enforcement or review of such cases. But under optimal conditions, for a Head of Household with very low income, the credit on Form 8880 can be as much as $2,500 (for a contribution of $5,000).


BMK

[AccTaxMan]

The IRS has warned against abusive transactions in which a contribution to a Roth IRA is made for the sole purpose of claiming the Retirement Savings Credit, and then immediately withdrawn.

I have not heard of any aggressive enforcement or review of such cases. But under optimal conditions, for a Head of Household with very low income, the credit on Form 8880 can be as much as $2,500 (for a contribution of $5,000).


BMK

I don't believe the taxpayer in question has claimed any retirement saving credit because of it.

And I do agree that they should make a rule to disqualify the retirement saving credits if the contribution does not stay in the IRA for more than a certain period.

[FEDUKE404]

Related question - Withdrawal of non-allowable Roth IRA contributions

You are correct. The early distribution penalty, and regular income tax, are applicable only to any earnings.

BMK

A client with more money than tax smarts put the maximum ($5,500 for him) into a Roth account during early 2013 (for tax year 2013). Dare I say his W2 income is close to double the limit for allowing such?

Anyway, his "investment adviser" is suggesting he now transfer those funds into a non-deductible traditional IRA account and then deal with Form 8606 et al. (Actually, I think the commission-based adviser is looking out for his own best interests and/or being lazy?)

Getting back on topic: It is my reading of the relevant rules that the taxpayer, aside from having to remove the excess 2013 (and now 2014) Roth IRA contributions to avoid the 6% penalty, would also have to pay regular old income tax on all earnings the "bad" money made while it was in the account. Now determining the dollar amount of those proportional account earnings, from 01/2013 through perhaps 03/2014, could well be a mathematical challenge, but the complexity of that calculation is not on my personal worry list.

Surely, in this situation, the client cannot just hide behind the "it's Roth = it's tax free" wall for removal of the principal + earnings from same. Can he?

Is this reasoning correct or not?

FE

[TaxGuyBill]

The IRS has warned against abusive transactions in which a contribution to a Roth IRA is made for the sole purpose of claiming the Retirement Savings Credit, and then immediately withdrawn.

I have not heard of any aggressive enforcement or review of such cases. But under optimal conditions, for a Head of Household with very low income, the credit on Form 8880 can be as much as $2,500 (for a contribution of $5,000).


BMK

The credit only takes into account of the first $2000 of contributions, so there is a maximum credit of $1000.

Do you by chance have a link to something from the IRS warning about abusing this? I haven't seen it. Thanks.

[ddoshan]

I believe the form 8880 and or the instructions for indicate or ask if there will be any distributions by the due date of the return including extensions. So I assume you can't put x amount into an IRA and then shortly thereafter withdraw the same amount.