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Penalty on Roth IRA Distribution


Dave T

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T/P, age 41,  made contribution to Roth IRA in prior year of $ 544.

In 2019 he makes total distribution from account in the amount of $ 438. Box 2b indicates total distribution and box 5 of 1099R shows his total contributions.

Distribution code is 1B. Early distribution of Roth IRA no known exceptions.

ATX doesn't show the $438 as taxable but does calculate an early distribution penalty.  Seems to me that there shouldn't be a penalty since his contributions exceeding his total withdrawal.

Am I missing something?

Thanks for your assistance

Dave T

 

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On ‎2‎/‎7‎/‎2020 at 11:15 AM, Dave T said:

T/P, age 41,  made contribution to Roth IRA in prior year of $ 544.

In 2019 he makes total distribution from account in the amount of $ 438. Box 2b indicates total distribution and box 5 of 1099R shows his total contributions.

Distribution code is 1B. Early distribution of Roth IRA no known exceptions.

ATX doesn't show the $438 as taxable but does calculate an early distribution penalty.  Seems to me that there shouldn't be a penalty since his contributions exceeding his total withdrawal.

 

You are correct.  There is neither tax nor penalty on a withdrawal of ROTH contributions.  I've had trouble with that form before and will try to recall who the client was and look up what I did to remove the incorrect penalty when I get back to the office Monday.   It's ATX, not you.

 

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Thanks Rita

If you find something I would appreciate it.  Seems to be conflicting opinions on this and my contention is that his contributions were greater than his total withdrawal and thus no penalty.

Others maintain it is because he doesn't meet the 5 year or 591/2 rules.

Thanks

 

 

 

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On 2/7/2020 at 2:00 PM, EricF said:

He didn't meet the 5 year rule, so the penalty applies.  The distribution itself is not taxable because he had basis exceeding the distribution.

The penalty applies to earnings and not the principal. He can take the principal at any time without penalty and tax.

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1 hour ago, Dave T said:

Thanks Rita

If you find something I would appreciate it.  Seems to be conflicting opinions on this and my contention is that his contributions were greater than his total withdrawal and thus no penalty.

Others maintain it is because he doesn't meet the 5 year or 591/2 rules.

Thanks

There's no penalty on withdrawing a ROTH contribution.  I'll try to recall what happened and what I did to get rid of the penalty - it was three years ago, I think.

https://www.google.com/search?q=is+there+a+penalty+on+withdrawal+of+roth+contributions&rls=com.microsoft:en-US:IE-Address&rlz=1I7TSNF_enUS426&ei=3lQ_XtueHpPrtQaCwaeYCg&start=0&sa=N&ved=2ahUKEwjbhYDmncPnAhWTdc0KHYLgCaM4ChDy0wN6BAgMEC0&biw=1311&bih=588#spf=1581208809174

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I think I figured this out. 

Entering the distribution and contribution on the 8606 didn't remove the penalty but entering the contribution on line 2 of the 5329 did remove it,  Since the contribution was greater than the total distribution penalty amount went to zero.

 

Thanks

 

 

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19 hours ago, Dave T said:

I think I figured this out. 

Entering the distribution and contribution on the 8606 didn't remove the penalty but entering the contribution on line 2 of the 5329 did remove it,  Since the contribution was greater than the total distribution penalty amount went to zero.

 

Thanks

Yes, I just found it and you need to enter Code 12 on Line 2 of Form 5329.

I was thinking about this yesterday, and I try not to answer questions that are not asked, but here, hold my tea.

If this is a new client (and you don't have prior year returns), I would suspect that this client made withdrawals from this account in the past and forgot to tell you.  I say that because almost all my folks hold mutual funds in these accounts, and the market has been going up since March 10, 2009 or thereabouts.  Not straight up, but up.  I am wondering how he managed to lose money.  I do know that some people defy the odds and pick exactly the wrong day to withdraw funds, or he may have invested in a loser.  You said he contributed in "prior year," and I'm not sure that's "a" prior year, or "the" prior year.  So, just thinking out loud, and never mind, carry on.  😂

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Thank you Rita.

Yes that is what I did. I entered Code 12 on the 5329 which removed the penalty.

Also yes as to new client.  I misspoke on my original post. His contribution was in 2019 and also withdrew in 2019.  He has changed jobs frequently during the year ( 4 w-2's ) and apparently withdrew after leaving one of his employers.  You are correct the market was on an upward trajectory but he must have cashed out on  a down day.

At any rate, thank you for your assistance.

 

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