Cashing out an IRA that was started with profits from home sale.

[IRA/CD/TAX]

I sold my home last year and I took some of the profits and opened an IRA which I later rolled into a CD.
Since the IRA was started with profits from a home sale rather than income do I have to report any money I withdraw to the IRS?
The transmission went out in my car and I need to buy a newer car and I would like to cash out a good down payment from my IRA.
Am I going to penalized in addition to the early withdrawal fee?

Thanks

 

[adjusterjack]

An IRA is an IRA. Regardless of how you funded it you'll pay ordinary income tax on the distribution. If you are under age 59 1/2 you'll pay the additional penalty tax.

The exceptions are explained starting on Page 22 of IRS Publication 590b:

https://www.irs.gov/pub/irs-pdf/p590b.pdf
I don't think buying a car qualifies.

 

[IRA/CD/TAX]

So since I put it in an IRA I kind of screwed myself from using the money without penalty?

 

[PayrollHRGuy]

Short answer, yep.

 

[IRA/CD/TAX]

The percent they would tax me is in addition to the early withdraw fee is based on my income level correct?

 

[adjusterjack]

The percent they would tax me is in addition to the early withdraw fee is based on my income level correct?

Ordinary income tax plus the 10% penalty is what you'll pay.

 

[FlyingRon]

There's something missing here. When you made the IRA contribution, did you not report it on your taxes? That should have lowered your tax liability for the year.

 

[Taxing Matters]

There's something missing here.

One of the things we are missing here is what kind of IRA the taxpayer bought. How this works out depends very much on whether it was a traditional IRA or a Roth IRA. We also do not know the age of the OP, and that matters too.

 

[IRA/CD/TAX]

The amount I put in the IRA still wouldn't have brought up my deductions above the standard deduction amount. It was a Roth IRA that I rolled into a 60 month CD. I am in my late 30's. Thank you all for the replies.

 

[FlyingRon]

You're making even less sense.

First, contributions to a Roth aren't deductible at all. Contributions to a regular IRA do not go on itemized deductions (the part that goes against the standard deduction), they are an adjustment to income and come off the top (schedule 1 this year).

The fact that the money came from a home sale is immaterial (and hopefully, if you owed any capital gains on that sale, you paid them rather than thinking you could just roll the gross into the IRA).

Now, since it is a Roth, you can pull out your contribution without penalty. You lose the tax free treatment as well as owing a ten percent penalty on the Roth IRA earnings if you take these out. I suspect since we're talking about a CD and a very short time frame, there really isn't much earnings to worry about, but you'll have to pay the tax.

 

[IRA/CD/TAX]

That is why I am in the forum. The bank I go to doesn't know anything about IRA's or taxes. They know how to put your money in an IRA, but have no idea how to advise anyone. I made well under the $250,000 capital gains limit. I am the working poor and only make $35,000 a year. I am trying to be smart with my money so that I have something at retirement age.

 

[FlyingRon]

So how much money did you put into the Roth?
How much do you want to remove?

If you want to withdraw no more than your contribution (and haven't previously removed any), you don't have a tax issue. The contributions come out first before the earnings. If you pull out any of the interest, then you'll have to report and pay the tax/penalty on that though, again, given what CDs pay over the short term, you probably don't have much of this to begin with.

I might also suggest that you do some research on financial planning (lots of books in the library as well as internet sources) rather than relying on a bank to tell you. In the long run, CDs are pretty lousy retirement vehicles.

 

[IRA/CD/TAX]

I have a 401K, but I don't trust the stock market long term and want to eventually move some money out of it to somewhere else. We are in a debt economy and it can't last and won't last without another crash. So I am trying to put money in different locations, especially places that are not stock dependent.

 

[BuyLowSellHigh]

There are money market funds available within a IRA or 401k. These are similar to a savings account at a bank.

I don't have a high degree of confidence in the stock market at this level so I moved my personal 401k to money market.

 

[davew9128]

There are money market funds available within a IRA or 401k. These are similar to a savings account at a bank.

I don't have a high degree of confidence in the stock market at this level so I moved my personal 401k to money market.

Used to have an older client who would invest her IRA in bank CD's. It wasn't a problem until the CDs matured and she started shopping banks for CD rates and rolling the money over every 90 days. She couldn't understand why she got a tax notice showing several hundred thousand in taxable distributions.