Roth IRA early distribution...

[Catherine]

Taxpayer, age 39, took money out of a Roth IRA as family needed money; about $5500.  Partially due to wife's high-risk pregnancy, no way to parse out how much was due to that and how much was due to failing business venture (also related; wife was running the business and could not run a store from bed rest).  

 

He can prove contributions of $3,000 (has lost other year-end statements) and meets the 5-year rule; first contribution was no later than 2005.  So about $2,500 is subject to taxation for lack of proof BUT I can't find whether or not this is subject to the early withdrawal 10% penalty as well. I'm probably reading it over and again (Tax Book and Pub whatever # it is) and it's just not clicking in my head.

 

Anyone have any other clues for where I can look?

 

Thanks,

Catherine

[Lion EA]

If it's taxable, and it sounds like the $2,500 might be, it's also subject to the 10% unless one of the exceptions applies on Form 5329.  Maybe # 05?

 

But, per The Tax Book:  "For a distribution from a Roth IRA to qualify for tax-free treatment, the distribution must be made after the 5-year period...Reg 1.408A-6,A-2."  It would certainly help if your client tracks down those forms the plan administrator sends out each May detailing contributions.  ($2,500 seems like a lot of earnings on only $3,000 in a down market.)  

 

And, any conversions have their own separate 5-year periods.

[Catherine]

Yeah, Lion -- they can only track down $3K in contributions (no conversions).  I'm sure most of the rest is - but we can't prove it.  Asking these folks to track down paperwork would not end well.  They have a new baby (source of her bedrest requirement last year), and he is horrible with keeping paperwork (she does all the bookkeeping for his business).  I've already asked and that's when she found info on the $3K.  As bad as an additional $250 in penalty is, it's better than the $300 more had she not found the docs from 2005 and 2007.  

 

While the medical issues caused the need to withdraw, their expenses didn't go over 10% AGI.  She was on bedrest... that "only" costs lost income (and a failed business), not expense.  

[Lion EA]

Do the medical expenses have to go over the 10% to be used to qualify for the exemption from penalty?  I know you can use medical expenses even if you do not itemize.  Probably worth going to the IRC to find out.

 

And, how about their annual statements?  Is there an information page at the end that has contributions for current year, for prior year?

 

If the client won't search further, and you're talking about less than $1,000, I'd probably stop nudging them and just complete their returns also.  Only $250 has got to be a small price to pay for peace of mind while awaiting a baby!  Good luck.

[Max W]

The client can request his Wage & Income transcripts from the IRS which will show under form 5498 the contributions for each year and the FMV. 

[Catherine]

Do the medical expenses have to go over the 10% to be used to qualify for the exemption from penalty?  I know you can use medical expenses even if you do not itemize.  Probably worth going to the IRC to find out.

 

And, how about their annual statements?  Is there an information page at the end that has contributions for current year, for prior year?

 

If the client won't search further, and you're talking about less than $1,000, I'd probably stop nudging them and just complete their returns also.  Only $250 has got to be a small price to pay for peace of mind while awaiting a baby!  Good luck.

 

 

From Pub 590:

"

• You have unreimbursed medical expenses that are more than 10% (or 7.5% if you or your spouse was born before January 2, 1949) of your adjusted gross income (defined earlier) for the year."