Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (2) | Ignore Thread Prev | Next
Author: KATinChicagoland Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121565  
Subject: Re: Roth Withdrawals Date: 3/8/1998 12:24 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
<<I understand that QUALIFIED Roth IRA withdrawals prior to age 59 1/2 that exceed your contributions are subject to tax but not a penalty. What about any amount withdrawn in order to pay the tax on that qualified withdrawal. Is that subject to both the tax and the penalty?
For example, a $10,000 Roth-IRA withdrawal used for a "not so recent" homeowner's (2 years) purchase of a home is subject to tax but no penalty. What about withdrawal of the funds to pay that tax?>>

You're in the right ballpark but missing some of the details.

A distribution (withdrawal) that meets the definition of a qualified distribution is free from both tax and penalty. To have a qualified distribution you need to satisfy the five-year test *and* meet one of the four "type of distribution" tests. One of those is the new "first-time homeowner" which you accurately refer to as the "not so recent" homeowner. So you can withdraw earnings from a Roth IRA tax-free to buy a new home is you qualify as a "first-time homeowner" and have satisfied the 5-year test.

If you fail to meet the five-year test but *do* meet the "type of distribution test," your distribution is not a qualified distribution. In that case you will indeed pay tax on the portion of the distribution that represents earnings (the amount in excess of your contributions). But you won't pay a penalty because you meet the "first-time homeowner" test. You would get the same result if you were over 59-1/2 and withdrew earnings from your Roth IRA before satisfying the 5-year test.

Sorry, but there's no rule that permits a penalty-free withdrawal to pay tax on another withdrawal, even if the other one is penalty-free. Seems like that would be a sensible rule, but for now at least it's not part of the law.

A discussion of distribution rules for Roth IRAs was recently added to the Fairmark Press web site (see below).

KAT in Chicagoland
www.fairmark.com
Tax Guide for Investors
Now featuring Roth IRA information
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (2) | Ignore Thread Prev | Next

Announcements

Disclaimer:
In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Post of the Day:
Macro Economics

Russia Collapsing Again?
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement