Roth IRA Contributions
Is it possible to contribute to a Roth, then withdraw the cost basis of a Roth IRA, use it as the client wishes (short term loan?) and then put what was borrowed back in to the Roth IRA later on the same year?
The Roth was established over 7 years ago. He just took out basis (There are no gains in the account) and is under 59.5.
Tks
Matt
Permalink Submitted by [email protected] on Fri, 2007-08-10 22:09
First of all, I’d find a new investment! That one did not do well! I’ll let the Roth people answer the penalty question, its always confusing to me (but I think he is ok).
Permalink Submitted by Alan Spross on Fri, 2007-08-10 23:44
Matt, simple question, but long answer……….
He should be able to replace the contribution provided that when the withdrawal was made, the IRA custodian was told that the withdrawal was either a return of contributions OR an excess contribution correction. If the withdrawal was processed this way, any earnings or losses MUST be recognized. It would be a real fluke to have exactly NO CHANGE in the account value, but if that is correct and the 1099R is coded as an excess contribution, the contribution can be replaced later.
However, if the withdrawal was processed as an early distribution and NOT as a corrective distribution, then he only has 60 days to roll the funds back in to the Roth. Failing that, he has already made his contribution of whatever dollar amount was made, and that amount cannot be replaced within the contribution time limit. A client should check his paperwork from the custodian to see exactly how that withdrawal was coded (early vrs corrective distribution).
Let’s say he contributes 4,000 then withdraws that amount with allocated earnings, and then 6 months later decides to replace the 4,000. The IRA custodian should issue a 5498 for $8,000 of contributions, but there will be a 1099R showing 4,000 +/- earnings to bring the net contribution down to the allowable 4,000. If the IRA custodian refuses to accept the second contribution, he could make the contribution with another IRA custodian. All the IRS looks for is that the total contribution less corrections does not exceed the contribution limit.
Permalink Submitted by Matt Carron on Thu, 2007-08-16 15:20
The distributions were coded as “early distributions” because they were not excessive nor were they a corrective. Given that, it seems that the only way to replce the distribution would be through the 60 days rollover rule. If that window is missed then they are out of luck for 2007 correct?
Why do you think the IRS mandates the 60 day rule for a roth given that there are no taxes or penalties due on a distribution of cast basis?
Permalink Submitted by Alan Spross on Thu, 2007-08-16 17:51
Correct. He has already made his 2007 contribution, then taken a distribution of the same amount and apparently exceeded the 60 day rollover limit. He cannot contribute again for 2007 without it becoming an excess contribution that would have be corrected. Although he only took out his basis, he will still have to report the distribution on Form 8606, even though no taxes will be owed.
Most of the Roth rules follow basic IRA rules in Sec 408, the major difference being taxation methodology. Those basic rollover time limits are probably there to discourage short term use of retirement funds, only allowing enough time to change custodians. Still, many people do use IRA funds for short term purposes and roll them back within 60 days. To discourage repetition of that practice, each IRA account is limited to one rollover in a 12 month period.