Roth IRA Early Withdrawl

Submitted by Andres Aponte on Mon, 2018-01-15 17:42

Hey,

Currently my wife and I have been going through some rough times and needing extra money to get back on track. I have a Roth IRA that was converted two years ago when I left one of my jobs. It started at around 8k and is up to 9.5k. I already have a 401k on my current job and had completely forgotten about the Roth IRA so I had not made any contributions. We have been contemplating taking out the funds on the Roth IRA and closing it down to help us get everything back under control. What penalties am I looking at? I know ML has a 75$ closing fee, and there is the 10% tax penalty, will all this be withheld by Merryl Lynch or do I have to put it aside and pay it on my taxes?

Thank You for the help.



Submitted by Alan - IRA critic on Mon, 2018-01-15 18:13

  • Assuming that your conversion of 8,000 was fully taxable and you are under 59.5, you would owe the 10% early distribution penalty on the 8,000 plus ordinary tax and 10% penalty on the 1,500 of gains. Possibly you qualify for an exception to the 10% penalty portion for certain situations such as disability, health insurance premiums if you are collecting unemployment, first home, etc.
  • You would report the distribution on Form 8606 and would receive a 1099R from the Roth custodian next January.
  • This assumes that this is your ONLY Roth IRA, and there have been no other regular contributions or conversions, and that this would be your first distribution from the Roth.
  • Note that if you choose to start up another Roth IRA at some point in the future, for purposes of the 5 year holding requirement, the year of that first conversion would still be considered the year of your first Roth contribution, even though you would have cashed in the account.
  • If you just took out 8,000, there would be no ordinary income tax, just the 10% penalty.
  • Decline withholding on this distribution if you or spouse have wages for which you can adjust your withholding. For a Roth distribution, they may take out too much since they have no idea how much is taxable.  You can also expect your wage withholding to be reduced in Feb due to the tax cuts.  If your problems are due to reduced income, you may also be having too much withheld anyway, and you may want to look into that.

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