Mutual fund co. says withdrawal from Roth is taxable
Working with a mutual fund company on withdrawing funds from a Roth IRA. They say there is a 10% penalty. Individual is 55 and funds have been in 7 years-but no matter, I thought the basis could be withdrawn free of penalty at anytime. Also, thought Roth’s were treated as FIFO as to the funds.
Permalink Submitted by mk foss on Tue, 2012-03-20 20:31
The mutual fund company is giving you misinformation. No 10% penalty after a conversion is in the Roth 5 years and principal is always withdrawn first. It isn’t exactly a FIFO basis, all contributions come out first, then all conversions, first the taxable portion with the oldest first, then any basis that was converted, lastly the growth is withdrawn.
Permalink Submitted by Alan Spross on Tue, 2012-03-20 23:15
I agree.
The Roth custodian is going to code all distributions for an IRA owner under 59.5 with Code J in Box 7. The custodian also has no idea how much is taxable since they do not know how many other Roth IRAs you may have or how old other conversions may be. When you complete Form 8606 reporting the distribution, and you have at least as much if regular contributions as you withdrew, the distribution will be tax free even though it technically is a non qualified distribution. Therefore the J is meaningless.
Now let’s assume you had no balance of regular contributions and your distribution came from your oldest conversions. If you took out enough to get to the taxable portion of a conversion done after 2007, then the J would indicate that the taxable amount of such conversions would be subject to the 10% penalty. Does not sound like that is the case here however.
Permalink Submitted by Jose Morales on Wed, 2012-03-21 15:38
You should never ask for tax advice from your IRA Custodian/Trustee. That should be left to your CPA or tax preparer.