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Author: Abhyasi One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121106  
Subject: No tax on returned Roth Contributions? Date: 3/5/2003 4:03 PM
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Hello,

I've become confused by forms 8606 and 5329, so I've come here with the
question: how do I report my early distribution from my Roth IRA in 2002, 
if the amount of the distribution did not exceed my contributions?

Here are the details:
12/00: Rolled-over $6517.96 (and reported it as income)
 7/01: Contributed $2389.83 (and did not deduct it)
 2/02: Withdrew    $8500.00 (and paid no tax at the time)

So since I'm essentially having part of my (already taxed) contributions 
returned to me, I don't have to pay tax (or penalty) on the $8,500 
withdrwawal, right?  I can't seem to figure out how forms 8606, 5329 and 
1040 want me to report it.

Thanks in advance,
-Abhyasi
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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64311 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/5/2003 5:42 PM
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12/00: Rolled-over $6517.96 (and reported it as income)
7/01: Contributed $2389.83 (and did not deduct it)
2/02: Withdrew $8500.00 (and paid no tax at the time)

So since I'm essentially having part of my (already taxed) contributions
returned to me, I don't have to pay tax (or penalty) on the $8,500
withdrwawal, right?


Not quite. Premature Roth distributions are ordered as follows:

1. Contributions
2. Conversions
3. Earnings

Thus, your $8500 withdrawal (line 19 of the 8606) consists of:

1. $2389.83 in contributions (line 20 of the 8606) plus
2. $6110.17 in 2000 conversion (line 22 of the 8606)

Since all this money has been previously taxed, you owe no income tax on the distribution (line 23 of the 8606). Since the conversion lasted less than 5 years you do, however, owe the 10% premature distribution penalty on the $6110.17, unless you meet an exception. See the note at line 21 of the 8606 and page 8 of the 8606 instructions.

Phil Marti
VITA Volunteer

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Author: 1000101 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64473 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/12/2003 5:53 PM
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I am in the same situation, I withdrew $1000 of original Roth contributions, thinking it would have no tax consequences, mainly going on the following Fool article:

http://www.fool.com/ira/rothvreg.htm?ref=mp
Choose a Roth IRA if you can do without the tax break right now. It's a more flexible instrument, because:

It allows you to withdraw your contributions at any time, penalty- and tax-free.

So thanks Motley Fool, real money saving investment advice. I now owe $100 and must file an admended return due to this dangerously false advice.

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64474 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/12/2003 7:37 PM
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I am in the same situation, I withdrew $1000 of original Roth contributions, thinking it would have no tax consequences, mainly going on the following Fool article:

http://www.fool.com/ira/rothvreg.htm?ref=mp
Choose a Roth IRA if you can do without the tax break right now. It's a more flexible instrument, because:

It allows you to withdraw your contributions at any time, penalty- and tax-free.

So thanks Motley Fool, real money saving investment advice. I now owe $100 and must file an admended return due to this dangerously false advice.


What are you griping about? The Fool's advice is correct. If you withdrew a contribution, you don't owe a penalty. If you withdrew a conversion within 5 years and don't meet any of the exceptions, you do owe a penalty. If you didn't read the rules and don't know the difference between a contribution and a conversion, you have no one to blame but yourself.

Ira

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Author: 1000101 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64476 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/12/2003 8:08 PM
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That's not what the 8606 instructions say.

Page 2 column 1 at the top.
"Exception. Any distribution made
during the 5-year period beginning
with the first year for which you made
a Roth IRA contribution or conversion
is not a qualified distribution, and
may be taxable. Because 1998 was
the first year for which Roth IRA
contributions or conversions could be
made, no Roth IRA distribution prior
to 2003 is a qualified distribution.


Also, in TurboTax for the web, there is no place to enter the breakdown between what was a contribution, and what wasn't. I'd been on their tech support line for 2 hours when I told them to forget it.

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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64477 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/12/2003 8:16 PM
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That's not what the 8606 instructions say

Well, you have to read all of them, and that can be daunting. (What you need are pages 7 and 8 of the instructions.) Let's see if we can walk you through it.

You want Part III of Form 8606. Line 19 is the amount you withdrew. Line 20 is the amount you have contributed, not including conversions, to the Roth that has not been returned to you (page 8 of the 8606 instructions).

Assuming that line 21 is zero or less, you owe no penalty.

You got hung up on the page 2 discussion of qualified distributions. Your distribution was not a qualified distribution, but not all "unqualified" distributions result in a penalty.

I'm sure Roy (TMF Taxes) accepts your apology.

Phil Marti
VITA Volunteer

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Author: 1000101 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64478 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/12/2003 8:20 PM
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Assuming that line 21 is zero or less, you owe no penalty.

That's good!


You got hung up on the page 2 discussion of qualified distributions. Your distribution was not a qualified distribution, but not all "unqualified" distributions result in a penalty.

I did read the whole thing. I thought the later discussion only applied to qualified distributions however, i.e. the stuff on page two "overrode" the later stuff.

I'm sure Roy (TMF Taxes) accepts your apology.

I hope so. I didn't mean it to be personal in any case. I'm very frustrated because TurboTax for the web will not allow me to enter the 1099-R without revising my tax up more than $100.

I have a question that might solve things. On my 1099-R, the IRA/SEP/SIMPLE box is not checked, but I noticed that other people who have taken similar early Roth withdrawals do have that box checked on theirs. Should that box be checked for this type of distribution?

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Author: 1000101 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64479 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/12/2003 8:46 PM
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I'm very frustrated because TurboTax for the web will not allow me to enter the 1099-R without revising my tax up more than $100.

After reviewing the 1099-X form produced by turbotax, it looks like it isn't increasing my income, in fact it is reducing my "credits" by $96.

Apparently, "Credit for qualified retirement savings contributions" is reduced by Roth distributions. I had a credit there from putting money into a 401k.

So, I really wasn't wrong, there is indeed a penalty for some people for withdrawing Roth contributions, and for me, it happened to work out to be right at 10% of my distribution.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64480 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/12/2003 9:22 PM
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1000101: "I'm very frustrated because TurboTax for the web will not allow me to enter the 1099-R without revising my tax up more than $100.

After reviewing the 1099-X form produced by turbotax, it looks like it isn't increasing my income, in fact it is reducing my "credits" by $96.

Apparently, "Credit for qualified retirement savings contributions" is reduced by Roth distributions. I had a credit there from putting money into a 401k."


This still sounds incorrect to me. TurboTax is not necessarily error free.

"So, I really wasn't wrong, there is indeed a penalty for some people for withdrawing Roth contributions, and for me, it happened to work out to be right at 10% of my distribution."

I would reserve that judgement until some of the resident pros weigh in.

Regards, JAFO




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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64482 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/12/2003 10:02 PM
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I'm very frustrated because TurboTax for the web will not allow me to enter the 1099-R without revising my tax up more than $100.

I have a question that might solve things. On my 1099-R, the IRA/SEP/SIMPLE box is not checked, but I noticed that other people who have taken similar early Roth withdrawals do have that box checked on theirs. Should that box be checked for this type of distribution?


AFAIK the box should have been checked. Try it and see what happens.

I've never used TT on the web, but if everything is working right the program should put the distribution on line 19 of the 8606. (This assumes box 7 of the 1099 is also correct.)

Phil

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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64483 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/12/2003 10:13 PM
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So, I really wasn't wrong, there is indeed a penalty for some people for withdrawing Roth contributions, and for me, it happened to work out to be right at 10% of my distribution.

Tomato, tomahto.

Double check Form 8880 to make sure that the retirement savings credit is properly calculated. Your Roth distribution should be included on, I think, line 4 (the one about distributions).

Also check the following:

Line 15a of the 1040 should be $1,000; 15b should be zero.
Line 58 of the 1040 should be zero.
The 8606 should be as previously discussed.

Phil

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Author: 1000101 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64485 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/12/2003 10:48 PM
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Line 15a of the 1040 should be $1,000; 15b should be zero.
Line 58 of the 1040 should be zero.
The 8606 should be as previously discussed.


The amended return as generated by TurboTax is correct. I owe the IRS about $100 due to changes in the 8880. I've verified the values you gave.

I do think the Fool should add this caveat to the Roth discussion. When someone sees "no penalty and no tax", it's easy to assume "no tax consequences", which, as I learned the hard way, is not always the case.

Thanks to everyone for their help.

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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64486 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/12/2003 10:55 PM
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Tomato, tomahto, indeed. You're not getting penalized 10% for withdrawing that Roth contribution. You're getting a smaller retirement savings credit than you would have had otherwise. And that's fair enough - the credit is determined (in part) by the net amount of your 2002 contributions to retirement savings (IRAs, 401Ks, 403Bs, etc.). You reduced that number by $1000 when you withdrew the contribution. Surely you don't expect to get credit for something you didn't do?

Lorenzo

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Author: 1000101 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64501 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/13/2003 5:47 PM
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You reduced that number by $1000 when you withdrew the contribution. Surely you don't expect to get credit for something you didn't do?

The net effect was that my effective tax rate was higher as a result of a Roth distribution that is purportedly tax free. The games the government plays with deductions/credits/etc is immaterial, the bottom line is what matters.

I bet you are the kind of person that thinks the marriage tax does not exist.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64508 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/13/2003 9:52 PM
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1000101: "I bet you are the kind of person that thinks the marriage tax does not exist."

It certainly does not exist for everyone. I pay less in tax because I am married; if I were single, my total FIT would be higher.

JAFO



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Author: Foolferlove Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64516 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/14/2003 11:03 AM
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The net effect was that my effective tax rate was higher as a result of a Roth distribution that is purportedly tax free.

I think you still don't understand.

Suppose I tell you I'll give you 10% off of a car I'm selling worth $1000. I'm going to give you $100 discount becuase I like you. You give me $900, and now you have the car that is worth $1000. You feel like you have saved $100, because you now have a car worth $1000 and only paid $900.

But the next day you realize you don't want a car. And I, being nice, agree to take back the car. In addition, I give you back the $900 you paid me. Did you just "lose" $100? No way! Would you demand that I give you $1000 for the car, even though you paid $900? No.

The point is, that 10% discount came AS A RESULT of buying the car. No car purchase, no discount. After returning the car, you are back where you started. No more, no less.

It's the same with your ROTH. After undoing the Roth contribution, you are back to where you had started. There is no "penalty". You just gave up your right to use a "discount" of sorts that you would have received with the ROTH contribution.

I'm no tax expert, but the people on this board who ARE, are doing their best to explain the rules to you. They have no ulterior motives. They are presenting the facts to the best of their knowlegde, which is extensive. There is no reason to get indignant or rude. They are trying to clarify a misunderstanding you have, and to point out that the ROTH contribution you withdrew was indeed tax-free, according to the details you have provided.

As you say in your post "the bottom line is what matters". That's exactly what everyone has been telling you. You received money in the past that was a credit due to a ROTH contribution. You withdrew that contribution, thus giving up the right to claim the credit, and must give it back. The bottom line is that you are no worse than before your contribution.

Do I have this right, tax guys and gals?

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Author: 1000101 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64526 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/14/2003 5:40 PM
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are doing their best to explain the rules to you.

They are doing a great job.

They have no ulterior motives

Never said they did.

There is no reason to get indignant or rude.

Was I? The Internet is a funny thing. It was not my intent to be rude to anyone here on the board. I am however slightly miffed at the Fool discussion of Roth IRAs in the articles section, I believe it is misleading. The replies I have gotten on this board have been extremely helpful in understanding the situation, however.

You received money in the past that was a credit due to a ROTH contribution. You withdrew that contribution, thus giving up the right to claim the credit, and must give it back.

It seems you have not been paying attention.. The Roth contribution was from a couple years ago. I withdrew part of that this year. The credit was due to 401K contributions I made during this year. Had I known there was this "de facto tax", I might have searched for alternatives for getting the money I needed. Since I was under the impression there would be no repercussions for withdrawing the Roth contribution, I did just that.

Suppose the government eliminated all tax credit programs. Would you say they raised taxes? I sure would. I hope you can at least se my point of view, even if you don't agree with it.

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Author: Foolferlove Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64527 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/14/2003 6:26 PM
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There is no reason to get indignant or rude.

Was I? The Internet is a funny thing.


Ok, I think I was too harsh in implying you were rude, and I apoligize for that. I only mean to say that I disagree with your beef against the TMF comment about there being no tax consequences for ROTH withdrawls.

But I'll admit that I may mistaken because I don't understand the credit for your 401(k) contribution. What kind of credit was "taken back". Is this the credit for retirment contributions that is available to those below a certain income? I think they call it the small savers tax credit. I assume we are not talking about the normal deduction one gets for putting money into a 401(k) or are we?

But if we ARE talking about the small-savers tax credit, then I mostly stand by my statements. For example, this credit is available as a percentage of your total retirement contributions. I think you get 10%-50% of up to a $2000 contribution, depending on your income. So this credit gives you back a portion of your taxes depending on how much you put into an IRA or 401(k) during the year.

But suppose that you withdrew $2000 from a previous year ROTH IRA contribution, and used that money to contribute to a 401(k). Should you get the credit? it's not like you saved the $2000, you merely shifted to a different pot. That's why I'll bet the formula takes into account net IRA contributions for the year.

So the fool's advice I think is still valid. You were not taxed on withdrawing the ROTH contribution. But you lost did lose the credit on another issue that deals with net contributions for the year.

You argue that this is still a "tax consequence". I can see your point, slightly.

But imagine you had taken $1000 from a traditional IRA. Not only would you have lost the credit, you would have had to pay penalties and taxes on that $1000. That's a true tax consequence on withdrawing the money early.

Anyway, I'm not even sure if this is the credit that applies to you, but I just use it as an example.

How about I agree with your point that the ROTH IRA withdrawal was not without it's consequenses? :)

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Author: 1000101 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64542 of 121106
Subject: Re: No tax on returned Roth Contributions? Date: 3/15/2003 3:18 PM
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That is indeed the credit. Due to my head-of-household filing status, and relatively low income last year, I was able to take 10% of the 401k contributions.

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