Early Roth Withdrawal

Submitted by Bob Lloyd on Fri, 2014-05-16 22:51

Roth account has balance of $34,000. Originally opened in 1998. Owner, under 59, wants to withdraw the total account balance. Neither the owner nor the custodian has records to indicate how much of balance represents “after-tax” contributions. No conversions ever occurred. Is there any rule of thumb or IRS guideline/ruling to guide how much of withdrawal would be taxable and subject to early withdrawal penalty.



Submitted by Alan - IRA critic on Sat, 2014-05-17 00:04

  • No IRS guidance on your question. Of course if owner could wait to 59.5, the Roth would be qualified and totally tax free. Otherwise, the distribution must be reported on Form 8606 which requires entry of the balance of regular contributions. If there were no conversions, the value in excess of those regular contributions will be taxable and subject to penalty. The reconstruction of the amount of regular contribution balance can become challenging depending on how any available records from multiple sources can be pieced together.
  • It is possible to file a request to the IRS for copies of all 5498 forms back to 1998. These can be added together to determine the total contributions, but any distributions taken must also be determined and subtracted from the 5498 total. These distributions include excess contribution corrective distributions. If there have been a limited number of Roth custodians, they might be able to alternatively provide the infor, perhaps for a fee. A custodian not having access to tax records (5498 forms) is baloney, they just don’t want to do the work. Also, check with prior tax preparers as many enter the contributions into their software even though they are not reported on the 1040. The software brings this info forward in many cases. With a mix and match approach, owner may be able to determing the total regular contributions still in the Roth.
  • If owner overstates the contribution total, tax and penalties could be levied. Like the owner, the IRS itself is probably poorly organized with respect to determing the correct figure without a major research project. But they have a right to ask the owner to document their basis, although I have heard no reports of this actually happening.
  • All Roth owners should keep and maintain a spreadsheet or simple tally sheet showing the amount and year of all Roth contributions and conversions. Most do not, and if they cannot wait until 59.5 to take a distribution, they will be in this situation of having a research project to report Roth distributions.

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