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Hello TMF Taxes!

Here's my situation: I'm a 29-year old single male and I opened a new Roth IRA in 1998 that contains $2000 in contributions and about $500 in earnings. Is it true that I may withdraw the $2000 contributions at ANY time without penalty or taxes?

The five tax year period and the four classifications of a "qualified" distribution that you list do not apply in this case because I'm only taking out the Roth IRA contributions, correct?

Thanks,

nelsonpc
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[[Hello TMF Taxes!]]

Yo!! Nelson!!!

[[ Here's my situation: I'm a 29-year old single male]]

Sweet fancy Jesus!!! I envy you already. But let's move on....

[[and I opened a new Roth IRA in 1998 that
contains $2000 in contributions and about $500 in earnings. Is it true that I may withdraw the
$2000 contributions at ANY time without penalty or taxes?]]

Yup. I don't know exactly how your Roth IRA got to this place, though. Your contribution (I assume) was $2k originally. So if the current value is now $2k, it really contains your original contributions. Any other gains or losses would really offset one another.

So I'm still not clear how you can make a $2k contribution, and now the FMV of the Roth IRA is $2k, but you say that it contains $500 of earnings. It would seem to me that the Roth IRA would contain your original $2k contribution. Nothing more. Nothing less.

But...that aside, you are correct. You can remove your $2k at any time, without taxes or penalties. You are doing nothing more than removing your original contribution, for which you received no tax benefit in the first place.

[[ The five tax year period and the four classifications of a "qualified" distribution that you list do not
apply in this case because I'm only taking out the Roth IRA contributions, correct?]]

Correctamundo...

[[ Thanks,]]

You are very welcome...

TMF Taxes
Roy

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There is, of course, the hidden "penalty" if you take this money out of your Roth IRA: you lose the ability to use it to build up tax-free earnings for an indefinite period. That's why I sometimes put "penalty-free withdrawals" on both lists: Roth IRA advantages, and Roth IRA disadvantages.

Kaye Thomas, author
Fairmark Press Tax Guide for Investors
http://www.fairmark.com
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TMF Taxes,

>> So I'm still not clear how you can make a $2k contribution, and now the FMV of the Roth IRA is $2k, but you say that it contains $500 of earnings. It would seem to me that the Roth IRA would contain your original $2k contribution. Nothing more. Nothing less.

To clarify, I initially put $2000 in a Roth IRA mutual fund. Due to the increase in the mutual fund price, it is now worth $2500. I reasoned that I am able to sell just enough shares of the fund to cover the $2000 withdrawal, but leave the remaining $500 so that I'm not penalized. Is it true that "earnings" include dividends AND capital gains?

Thanks,

nelsonpc
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[[To clarify, I initially put $2000 in a Roth IRA mutual fund. Due to the increase in
the mutual fund price, it is now worth $2500. I reasoned that I am able to sell
just enough shares of the fund to cover the $2000 withdrawal, but leave the
remaining $500 so that I'm not penalized.]]

Make sure that you understand the penalty issues and the required order to fund withdrawal. In your situation, the first $2k that you take out of your Roth IRA will be treated as a return of your original investment, and will not be subject to taxes or penalties. This is true because the IRA was created by a contribution. If you have ANY OTHER Roth IRA funds that may have been created by conversion funds, the rules are not as clear. Just as you can't carve out a specific IRA when you make a conversion, you can't carve out a specific Roth IRA account when you decide to take a distribution. What you have is one big Roth IRA. So if you have Roth IRAs that were created both by contributions AND conversions, make sure that you know the rules with respect to distributions. You certainly don't want any unplesant surprises.

You can read more about the Roth IRA distribution and penalty rules in my series on the Roth IRA in the Taxes FAQ area. You should really check it out.

[[ Is it true that "earnings" include
dividends AND capital gains?]]

Yup. For all intents and purposes, earnings include virtually everything other than the original contributions.

TMF Taxes
Roy

Want to learn more about taxes and investing? Then we have a deal for you!! The Motley Fool Investment Tax Guide is now available through Fool Mart. Be the first one on your block to own this masterpiece. There is still time available to do that tax planning (and tax saving) before the end of the year. So just click on this link (http://www.foolmart.com/market/product.asp?pfid=MF+013+I) to read more about this amazing collection of tax information. (Apologies for the shameless plug…but it is a pretty good book…if I do say so myself). In addition, if you would like to visit the Taxes FAQ (Frequently Asked Questions) area, click on http://www.fool.com/school/taxes/taxes.htm and you'll be right at the home page. Pay special attention to the "archives" section. Check it out. Finally, if you need to get to the IRS web site, click on http://www.irs.ustreas.gov to go directly there.
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