Roth IRA Distribution Rules
I am pretty familiar with the rules regarding Roth IRA account. I want to get clarification and understanding on distribution on Roth IRA account that is less than 5 years old and owner is less than 59 1/2 years old.
My question is the withdrawal on your contribution tax free and penalty free from the ROTH IRA? Thanks for any feedback and response.
Khai
Permalink Submitted by Alan - IRA critic on Mon, 2021-08-16 18:30
Yes, your regular contributions can be withdrawn tax and penalty free anytime, and these come out first. Conversions come out second, oldest first. Distributions of conversions are also tax free, but the taxable portion of a conversion is subject to the 10% penalty if the conversion has not been held 5 years.
Permalink Submitted by Khai Nguyen on Mon, 2021-08-16 18:52
Thanks for responding to my question. I appreciate for clarifying that. Here is my other question. I have a Roth IRA account with a brokerage firm and trying to initate my distribution of my contributions from my Roth IRA account. But I am not sure what to select when it comes to type of distribution? I contributed $1,050 in year 2020 And just want to with that amount to avoid any tax penalty. Type of Distribution:1. Disability2. Excess Contribution Removal After Tax Deadline3 Excess Contribunion Remvoal Before Tax Deadline4. Premature5. Rechacterization Current Year6. Recharacterization Prior Year i appreciate if anyone can guide me to select the appropriate option. thanks, khai
Permalink Submitted by Alan - IRA critic on Mon, 2021-08-16 19:31
For your purposes, select “Premature”, which is the same as an early distribution. Just ask for the amount of the contribution without mentioning any particular year. You will receive 1050 tax and penalty free, but you still have to report the distribution on Form 8606, and you will have to show the amount of your total regular contributions made for all years, as that goes on line 22 of Form 8606.
Permalink Submitted by Khai Nguyen on Tue, 2021-08-17 19:06
I am aware that the contribution limit for 2021 for individuals under age 50 is $6,000. Say for example, you have a 2 year old Roth IRA account and contributed $6,000 in 2019 and $6,000 in 2020. My question is that if you withdraw $6,000 from the Roth IRA account, is there a way to put back the $6,000 into the account without counting your contribution limit for the current tax year? Thanks, khai
Permalink Submitted by Alan - IRA critic on Tue, 2021-08-17 19:45
A specific return of a year’s contributions must be done by the due date. But if you have a year’s contribution returned with earnings prior to the deadline for that year’s contributions, you can recontribute. But it is now too late to make 2020 contributions even if you can still withdraw an earlier 2020 contribution. For example, if you made a 2021 contribution and had it returned with earnings, it would no longer count and you could make a new 2021 contribution up to 4/15/2022.
On the other hand, if you just request a distribution of 6000 without specifying that it comes from your 2020 or 201 contributions, there is no earnings calculation, and you could not re contribute for 2021, or any prior year.
Regular Roth contributions can always be distributed tax and penalty free anytime including the day after you make the contribution. But if you ask for the return of a specific year’s contribution, the custodian must include earnings on that contribution. Such earnings will be subject to tax and 10% penalty if under 59.5.
Put another way, if you only request a distribution of 6000, any prior contributions are still considered to have been made. But if you request the return of the current or prior year contribution with earnings, then the contribution returned will be treated as not having been made. You can then recontribute if you qualify and the deadline for contributions for that year has not passed. The deadline for 2020 contributions passed on 5/17/2021.