Roth IRA Question

[phatrabbitzz7]

From what I understand one can take out the contribution out of a Roth IRA at anytime without any penaltys. So if I open a Roth IRA account today for 2007 and put $4000 in it, can I take the money out, contribution only ($4000), several days later and not contribute anything until August 2008 and put $9000 (=$4000 for 2007 and $5000 for 2008?

TIA

 

[OAG]

Nope! If otherwise eligible to open a ROTH you pay taxes on this years contribution. Then withdraw the initial contribution, tax free. Now next year you are limited to the amount that applies for contributions, if otherwise eligible, ($4 or $5K). All you appear to be doing is prepaying taxes by one year. Also, it is early in the morning, but there is also a 5 year limitation in there someplace. What is the objective of this maneuver?

 

[Nords]

From what I understand one can take out the contribution out of a Roth IRA at anytime without any penaltys. So if I open a Roth IRA account today for 2007 and put $4000 in it, can I take the money out, contribution only ($4000), several days later and not contribute anything until August 2008 and put $9000 (=$4000 for 2007 and $5000 for 2008?

Sounds like one of George Carlin's complicated religion questions that he used to save for Father Rivera.

The short answer to your question is "No."

You can make the annual Roth IRA contribution anytime up to 15 April of the following year. If you take it out and don't put it back before that 15 April deadline then you're done. (It's a contribution, not a 401(k) loan.) But you can make the current year's Roth contribution up to 15 April of the following year.

Tax laws aside, if you withdrew $4000 from a freshly-opened Roth, the reality is that your Roth custodian would shut down the account and probably charge you a bunch of nuisance fees. If you complained then they'd avenge themselves upon you at next year's tax time with late mailings of multiple versions of incorrect Forms 5498 and 1099-R. (Even if you don't complain, they'll probably still do that anyway-- only out of ignorance rather than malice.) So the exercise is a costly one (beyond the lost compounding) and ultimately more trouble than expedience.

 

[millerjwm]

Roth - time must elapse before withdrawal

You said that the Roth account had recently been opened. There is a minimum time that a Roth account must be open before you can make any withdrawals without a special penalty. I believe this time is five years.

 

[igsoy]

You said that the Roth account had recently been opened. There is a minimum time that a Roth account must be open before you can make any withdrawals without a special penalty. I believe this time is five years.

I could swear I read that if you withdrew that current year's contribution, there were no consequences, they just treated it as if you had never made any contribution. But if you are withdrawing from a prior year, then the five year limit applies.

BTW, possibly the within-5-years penalty we are discussing would not be assessed on your contributed amount, but rather only on the gain, I think?

 

[OAG]

Seek and thou shalt find: Publication 590 (2007), Individual Retirement Arrangements (IRAs)

 

[phatrabbitzz7]

K, say I contribute $4k on april 1st. Can I take the money out on may 1st, and in august put in $9k ($4k for 07 and $5k for 2008?

The reason is that I have better things to do with the $4k in the following months but after that I'd have nothing to do with it and don't want to lose the $4k contribution time period for 07.

I was under the impression that there are no penalties for contribution withdrawl for a roth ira.

 

[free4now]

K, say I contribute $4k on april 1st. Can I take the money out on may 1st, and in august put in $9k ($4k for 07 and $5k for 2008?

The reason is that I have better things to do with the $4k in the following months but after that I'd have nothing to do with it and don't want to lose the $4k contribution time period for 07.

I was under the impression that there are no penalties for contribution withdrawl for a roth ira.

My understanding is that yes you could do this and there would be no penalties. The ability to withdraw principal from a Roth IRA at any time for any reason is for some reason a big secret that hardly anyone understands.

My understanding is that the 5 year limit relates to interest not principal.

You would have to worry about the low account balance triggering nuisance fees, which could potentially wipe out any advantage.