Avoiding Tax Penalty on Roth IRA Withdrawal

[Kilikikero]

I live in Texas, and I have a personal Roth IRA account opened roughly 4 years ago, with approximately $15,000 in contributions and $3000 in earnings. I was hoping to withdraw about $10,000 in contributions to help finance the down payment on a house. My understanding is that I can withdraw contributions at any time without tax or penalty. However, my IRA holds a variety of mutual funds, with varying degrees of gains and losses for the contributions that I originally invested.

I had two questions:

1. To avoid a penalty, can I only withdraw the contributions made to each individual mutual fund? Or can I withdraw the contributions and earnings from a fund, so long as I'm within the total contributions made to the IRA account overall?
2. Will I need to gather any special documentation accounting for the withdrawal for when I do my taxes next year? I'm just wondering in case I might need to keep track of anything ahead of time, or if it would even need to be reported on my taxes in some way.

Any help that anyone can provide is very greatly appreciated, thanks very much!

 

[PayrollHRGuy]

What are you withdrawing the money for? It matters.

 

[Just Blue]

What are you withdrawing the money for? It matters.

OP said it was to help finance a down payment on a house.

 

[adjusterjack]

What are you withdrawing the money for? It matters.

Not if one is withdrawing just the contributions. This is a Roth, not a regular IRA.

To avoid a penalty, can I only withdraw the contributions made to each individual mutual fund? Or can I withdraw the contributions and earnings from a fund, so long as I'm within the total contributions made to the IRA account overall?

Your contributions were made with after tax money so you can withdraw them any time without tax or penalty. You don't withdraw the contributions to the funds, you withdraw $10,000 from your Roth. You will have to sell whichever mutual funds need to be sold to make up that $10,000. Gains or losses would be irrelevant.

Example. You have $18,000 in the account comprised of 5 mutual funds with the following amounts: $5000, $2,000, $3,000, $7,000 and $1,000.

You don't have to sell all the funds, you can sell just those that total the $10,000 that you want to withdraw and leave the rest alone. If any of your funds are losers, you'll probably want to sell them first. If you think all of your funds have potential for growth you can sell partial shares from any of the funds and still keep the funds.

Will I need to gather any special documentation accounting for the withdrawal for when I do my taxes next year? I'm just wondering in case I might need to keep track of anything ahead of time, or if it would even need to be reported on my taxes in some way.

As for recordkeeping your monthly transaction statements and 1099 at the end of the year are enough.

On your 1040 you would show the distribution on Line 15a and the taxable amount on 15b would be -0-.

https://www.irs.gov/pub/irs-pdf/f1040.pdf

Check out IRS Pub 590b for more information on Roth distributions:

https://www.irs.gov/pub/irs-pdf/p590b.pdf

 

[Taxing Matters]

I think your questions are best answered by looking at IRS publication 590-B starting on page 30. It provides the rules for how to aggregate funds to determine what withdrawls are taxable. If you have more questions after reading that, feel free to ask here.

 

[FlyingRon]

The IRS has a definite order they treat money coming out of the Roth.

If you're not 59 1/2, you still owe the 10% PENALTY. You just don't have to pay income tax on the withdrawal amounts.

 

[adjusterjack]

If you're not 59 1/2, you still owe the 10% PENALTY.

I'm not sure that's true but, even if it is, you don't pay the penalty if "You use the distribution to buy, build, or rebuild a first home." Quoted from Page 31 of Pub 590b.

 

[LdiJ]

I live in Texas, and I have a personal Roth IRA account opened roughly 4 years ago, with approximately $15,000 in contributions and $3000 in earnings. I was hoping to withdraw about $10,000 in contributions to help finance the down payment on a house. My understanding is that I can withdraw contributions at any time without tax or penalty. However, my IRA holds a variety of mutual funds, with varying degrees of gains and losses for the contributions that I originally invested.

I had two questions:

1. To avoid a penalty, can I only withdraw the contributions made to each individual mutual fund? Or can I withdraw the contributions and earnings from a fund, so long as I'm within the total contributions made to the IRA account overall?
2. Will I need to gather any special documentation accounting for the withdrawal for when I do my taxes next year? I'm just wondering in case I might need to keep track of anything ahead of time, or if it would even need to be reported on my taxes in some way.

Any help that anyone can provide is very greatly appreciated, thanks very much!

If you read the publication that TaxingMatters recommended that you will read, you will find that the 4 years is a problem.

 

[Kilikikero]

Thank you all very much for the explanations, thoughts, links and replies, it's all very much helpful and appreciated.

From the IRS Pub 590b, a few lines stuck out to me:

1. In the section "Are Distributions Taxable?" it says: "You don't include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s)."
2. In the section "Additonal Tax on Early Distributions" it says: "Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that aren't qualified distributions."

Those lines seem to indicate that distributions that are made up of regular contributions aren't considered taxable, and that the 10% additional tax penalty only applies to the taxable part of the distribution (which to me, would suggest that it only applies to any earnings that are withdrawn).

Does that interpretation seem accurate? It would seem to align with adjusterjack's original post, as well as various other sites I've seen online.

 

[adjusterjack]

If you read the publication that TaxingMatters recommended that you will read, you will find that the 4 years is a problem.

Not necessarily. 2018-2014=4 in math but Roth IRAs compute the years differently. If the Roth was opened in 2014, then 2014 is year 1 no matter what part of the year you open it. 2015 is year two, 2016 is year 3, 2017 is year 4, 2018 is year 5 no matter what part of the year you take the distribution.

Pretty sure that's how it works.

I hope Taxing Matters comes back and clears it all up.