Can't get a straight answer on early Roth IRA penalty

[sirsavesalot]

It seems every site I check out, they state if you withdraw from a Roth IRA before 59 1/2 you will be hit with a 10% penalty and you "may" owe income taxes. I'm in the process of potentially moving a bunch of funds from a rollover IRA to my Roth IRA (24% bracket). However, I have a plan that might require me to take some money out early (I'd rather not get into that here). If I'm going to be hit with a "maybe" tax penalty, then it would make sense to just leave it in my traditional IRA until that time comes. Then, I wouldn't be double taxed during my conversion and during my early withdrawal.

Does anyone have 100% confidence how this would work? I would likely be in my upper 40's when the time would come, and it would be well over 5 years after I make the Roth conversion.

I know it's not an ideal situation, but it is what it is.

Thanks.

 

[OldShooter]

It seems every site I check out, they state if you withdraw from a Roth IRA before 59 1/2 you will be hit with a 10% penalty and you "may" owe income taxes. I'm in the process of potentially moving a bunch of funds from a rollover IRA to my Roth IRA (24% bracket). However, I have a plan that might require me to take some money out early (I'd rather not get into that here). If I'm going to be hit with a "maybe" tax penalty, then it would make sense to just leave it in my traditional IRA until that time comes. Then, I wouldn't be double taxed during my conversion and during my early withdrawal.

Does anyone have 100% confidence how this would work? I would likely be in my upper 40's when the time would come, and it would be well over 5 years after I make the Roth conversion.

I know it's not an ideal situation, but it is what it is.

Edit: Sorry, a withdrawal from a Roth may be taxable income, as highlighted below.

Thanks.

I dunno. A simple reading of your first sentence would lead me to read that since the withdrawal is taxable income you might, depending on your tax rate, have to pay taxes on it. IOW, not a penalty. Just the normal course of business.

It's the tax code. Anyone with "100% confidence" about the future tax code hasn't been paying attention.

 

[RetiredHappy]

deleted

 

[MissMolly]

You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA:

Withdrawals from a Roth IRA you've had more than five years.
If you're under age 59½ and your Roth IRA has been open five years or more, your earnings will not be subject to taxes if you meet one of the following conditions:

You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
You use the withdrawal to pay for qualified education expenses.
You use the withdrawal for qualified expenses related to a birth or adoption.
You become disabled or pass away.
You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you're unemployed.
The distribution is made in substantially equal periodic payments.

 

[Andre1969]

I tried googling it and agree, it's confusing. It looks like you can withdraw contributions into a Roth IRA at any time, but you have to wait 5 years for any earnings. However, if you do a conversion from a regular IRA to a Roth, it looks like you have to wait 5 years to touch any of it, or else you'll get hit with that 10% penalty.

At least, that's what I read into it...I could be totally wrong.

 

[sirsavesalot]

I get what you guys are saying, but I don't quite understand how they could figure out how much tax is owed. For example:

A traditional IRA makes sense that you pay income tax and a penalty. That money has never been taxed.

However, the Roth was already taxed. Let's say I put $30k into my Roth over 5 years, and payed 24% tax on that money before I put it in. That's $7200 in taxes. Then, let's say the stock market tanked for a few years, then went back up to even. I still have $30k in my Roth. I then take the $30k out early at age 48. I pay $3000 in fees (10%), then another $7200 in income tax? That doesn't quite add up for me. You would be paying $14,400 in taxes for the Roth IRA, but with a traditional IRA only $7200 in taxes. Both get hit with a 10% ($3000) fee.

Now, if you're taxed on the gains over the years I would buy that, but I don't understand how they could figure those gains out.

 

[ocean view]

Deleted

 

[finnski1]

I get what you guys are saying, but I don't quite understand how they could figure out how much tax is owed. For example:

A traditional IRA makes sense that you pay income tax and a penalty. That money has never been taxed.

However, the Roth was already taxed. Let's say I put $30k into my Roth over 5 years, and payed 24% tax on that money before I put it in. That's $7200 in taxes. Then, let's say the stock market tanked for a few years, then went back up to even. I still have $30k in my Roth. I then take the $30k out early at age 48. I pay $3000 in fees (10%), then another $7200 in income tax? That doesn't quite add up for me. You would be paying $14,400 in taxes for the Roth IRA, but with a traditional IRA only $7200 in taxes. Both get hit with a 10% ($3000) fee.

Now, if you're taxed on the gains over the years I would buy that, but I don't understand how they could figure those gains out.

No. Since you are still at $30k (which equals your contributions) you could take all that $30k back out without penalty or taxes. You already paid the taxes before putting the money into the roth. This is why I keep track of my cost basis for all contribution to my roth ira's. Actually by using turbo tax each year it kind of prompts you each year and keeps track of you running total(cost basis ) as well.

 

[kgtest]

No. Since you are still at $30k (which equals your contributions) you could take all that $30k back out without penalty or taxes. You already paid the taxes before putting the money into the roth. This is why I keep track of my cost basis for all contribution to my roth ira's. Actually by using turbo tax each year it kind of prompts you each year and keeps track of you running total(cost basis ) as well.

I also track all of my roth contributions. I just do it in a spreadsheet. No need for TT to do it.

 

[SnowballCamper]

https://www.irs.gov/pub/irs-pdf/i5329.pdf

"Distributions from a designated Roth account. If you received an early distribution from your designated Roth account, include on line 1 the amount of the distribution that you must include in your income. You will find this amount in box 2a of your 2020 Form 1099-R." page 3 of the instructions for Form 5329 where you report the early distribution.

 

[Koolau]

I think you have your answer in the posts above but my suggestion would be to consult a tax professional. $200 for an hour sit down with your last tax return and you could get the lay of the land - even beyond Roth IRA issues. Sounds like you are planning some relatively large "moves" in your financial plan. A few bucks to be certain (and maybe pick up some pointers) might be money well spent. As always, YMMV.

 

[oldtimer]

Bogleheads wiki topic Roth IRA has a table in the notes section that I consider the best summary of treatment of Roth IRA distributions.


You will be able to pull out the conversion amount after 5 years tax & penalty free. Roth earnings are the earnings gained while the contributions and conversion amounts are in the Roth IRA. Roth earnings are the last thing that can be withdrawn from the Roth. Sequence of withdrawals are shown in the table from top to bottom. The money in the categories above earnings must be withdrawn before earnings.

 

[NgineER]

As others have said,
Contributions can be withdrawn at any time tax and penalty free
Under 59.5, roll-overs/conversions can be withdrawn penalty and tax free after five years.
Under 59.5, earnings are taxable and have a 10% penalty in general, exceptions exist.