IRS penalties for early withdrawal of Roth IRA’s with a loss
Hello,
Have a client who contributed (not converted) to a 2007 Roth IRA ($4,000) but didn’t tell me that they had $0 W2 income, since they work overseas. They have no gain thus far, but would they suffer any excess contribution penalty or anything like that if they get the $ back out? Since there was no gain and no deductions, I was thinking that they should be okay…and if so, can they take a loss on their 2008 taxes?
Thank you!
Tracy
Permalink Submitted by Alan Spross on Thu, 2008-03-20 19:56
There is an excess contribution here if the foreign earned income exclusion offset the salary. But if there is no gain on the Roth contribution, then there will be no tax consequences for correcting the excess contribution, as long as it is corrected by the extended tax due date.
While there would be no taxable income with no earnings on the contribution, neither is there any way to deduct the loss that occurred in the IRA, unless it is done under the rule where all Roth IRAs are entirely closed out.
Permalink Submitted by Tracy Poole on Thu, 2008-03-20 20:02
First, thank you Alan.
Could you expand on the extended tax due date, please?
Permalink Submitted by Alan Spross on Thu, 2008-03-20 22:40
Yes. The extended due date for the tax year is Oct 15th, BUT ONLY if the return is either filed on time or if an extension is filed. In other words, if nothing at all is done by April 15th, then there is no extended due date and April 15th becomes the deadline.
This applies for correcting excess contributions under the provisions for correcting on a timely basis, and therefore avoiding the 6% excise tax. This date is also the deadline for recharacterizing regular contributions or conversions or simply requesting a return of regular contributions. All of the above changes require an earnings calculation to determine the amount of earnings, if any, that must accompany the correction.