roth
I have just been determined to be disabled by social security. If I cash in my Roth IRA, will it be subject to the excise tax since I am only 45? Also, what part of the roth ira is taxable?
Thanks.
I have just been determined to be disabled by social security. If I cash in my Roth IRA, will it be subject to the excise tax since I am only 45? Also, what part of the roth ira is taxable?
Thanks.
Permalink Submitted by Alan Spross on Mon, 2009-03-30 21:52
You will have to determine how much of your Roth IRA balance is from contributions. Any amount in the account in excess of contributions are earnings. Only the earnings are taxable, and ONLY then if your first Roth contribution was not made prior to 2005. The disability qualifies your Roth to be fully tax free with respect to the earnings once you complete the 5 year holding period. Prior to the 5 years, ONLY the earnings would be taxable, and they come out after all your contributions. The disability exception would also eliminate the early withdrawal penalty IF your earnings were taxable and also the penalty on any conversions you made if held under 5 years. So you will have to add up all your Roth activity back to your first contribution to determine how much is regular contributions, how much is conversions, and how much is earnings.
You will need to report your distribution on Form 8606 unless you can provide your IRA custodian evidence of disability and they code your distribution with a “Q” for qualified on the 1099R.
Acceptable disability is defined as inability to perform any substantial gainful activity because of a physical or mental condition. Usually, qualification for SSD will suffice, but it is not an automatic qualifier.
Too bad you will have to take distributions from your Roth IRA at an early age. The retroactive SSD payout may help cover some of the expenses. Also, note that if you receive a large SSD payment, the lump sum election may save you taxes on the payment.