how to withdraw *contributions* from Roth before year-end
July 3, 2022 2:34 PM Subscribe
I contributed to a Roth January-July 2021, and I want to withdraw those *contributions* now (none of the earnings), long before I file my 2021 return. How to document this, to show the IRS no tax is owed on it?
My taxes are usually simple. W-2, standard deduction. You are not my tax advisor or my financial advisor.
I started out January 2022 thinking I would try to contribute $6,000 to a Roth, broken down into payments of $250 semimonthly. So far I've been doing that. I have contributed $3,250.
However, I recently learned about Series I bonds that are earning a guaranteed rate of 9.62 percent.
I would have to hold the I bonds for at least a year, so I don't want to wipe out my emergency fund to buy them.
I would like to put the $6k that would have gone into my Roth IRA into Series I bonds instead.
But if I'd have to pay tax or penalty to withdraw the $3,250 I already put in the Roth this year, then I won't withdraw it.
I'm not 59 1/2 yet. I've had the Roth more than 5 years.
I think the answer is on page 31 of Publication 590-B: "If you withdraw contributions...by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them."
I'm hesitating, though, to click the button on the Roth provider's website that says, are you sure you don't want us to withhold any tax on the $3,250 bank transfer of your withdrawal?
I'm getting tripped up because it is a withdrawal (I'm taking the money out), but it's not a qualified withdrawal (it's not for a first home, etc.), but it shouldn't be subject to tax (because it's treated like it was never contributed). Right?
How will I document for the IRS that this was taken out the same year it was put in? And that it was contributions, not earnings?
Is this going to complicate my taxes so much that I'll end up paying $300 worth of TurboTax+time+frustration next April, instead of my usual simple IRS Free File, and won't be worth it?
My taxes are usually simple. W-2, standard deduction. You are not my tax advisor or my financial advisor.
I started out January 2022 thinking I would try to contribute $6,000 to a Roth, broken down into payments of $250 semimonthly. So far I've been doing that. I have contributed $3,250.
However, I recently learned about Series I bonds that are earning a guaranteed rate of 9.62 percent.
I would have to hold the I bonds for at least a year, so I don't want to wipe out my emergency fund to buy them.
I would like to put the $6k that would have gone into my Roth IRA into Series I bonds instead.
But if I'd have to pay tax or penalty to withdraw the $3,250 I already put in the Roth this year, then I won't withdraw it.
I'm not 59 1/2 yet. I've had the Roth more than 5 years.
I think the answer is on page 31 of Publication 590-B: "If you withdraw contributions...by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them."
I'm hesitating, though, to click the button on the Roth provider's website that says, are you sure you don't want us to withhold any tax on the $3,250 bank transfer of your withdrawal?
I'm getting tripped up because it is a withdrawal (I'm taking the money out), but it's not a qualified withdrawal (it's not for a first home, etc.), but it shouldn't be subject to tax (because it's treated like it was never contributed). Right?
How will I document for the IRS that this was taken out the same year it was put in? And that it was contributions, not earnings?
Is this going to complicate my taxes so much that I'll end up paying $300 worth of TurboTax+time+frustration next April, instead of my usual simple IRS Free File, and won't be worth it?
I am not an expert but I too have wondered about this. I believe contributions are treated like a savings account. As in you're just moving your own money from one account to another which is not a IRS reported function. It is my understanding that it would only be if you get audited that you would need to prove that the withdrawals were contribution only which should be shown by deposit records.
This is the closest to my example I have seen. It is basically saying you never even report contribution withdrawals on your taxes.
When filing your tax returns, you don't include in your gross (taxable) income any distributions that are a return of your regular contributions from your Roth IRA(s).1
Because contributions to a Roth are made with funds on which you’ve already paid taxes, IRS rules allow you to withdraw that money (or strictly speaking, the same amount of money) without owing any more tax on it.
posted by M Edward at 4:13 PM on July 3, 2022 [1 favorite]
This is the closest to my example I have seen. It is basically saying you never even report contribution withdrawals on your taxes.
When filing your tax returns, you don't include in your gross (taxable) income any distributions that are a return of your regular contributions from your Roth IRA(s).1
Because contributions to a Roth are made with funds on which you’ve already paid taxes, IRS rules allow you to withdraw that money (or strictly speaking, the same amount of money) without owing any more tax on it.
posted by M Edward at 4:13 PM on July 3, 2022 [1 favorite]
Best answer: I agree with your reading of page 31. I am assuming you have no earnings on that money, but if you do then note you need to include the earnings in your income:
"The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions."
I also understand being wary that this will all work out tax-wise. I would speak to a person with your Roth provider to make sure you are doing all the necessary steps to withdraw your 2022 contributions and not anything that was previously in the account. Also, confirm with them that this will not be reported on any tax form. I have a friend who took a Roth withdrawal in 2016 and was issued a tax form with the wrong distribution code on it. She never filed the form because she was told it was not taxable. The IRS did nothing but the tax dept of the state she lives in came back to her 3-4 years later and insisted she pay taxes on it. We had to fill out another form, waste time on calls with both the state and IRS and fax a new form to the IRS. They never sent anything to the state and they ended up seizing the money from her account.
How to document this, to show the IRS no tax is owed on it?
This is why your provider should be able to tell you if they will issue a 1099 for this or not and if they will, what code they will put in boxes 1,2, and 7. Box 1 is the total amount and Box 2 is the taxable amount. If they will show Box 2 as zero and/or a non taxable code in box 7, then you'll need to file that with your taxes. It is not much worse than entering in another W-2. If they don't issue a 1099 at all, I would still watch for one in the mail or our Roth account in early 2023. If one exists, they sent it to the IRS and your state tax dept, if one exists, so you want to file it.
posted by soelo at 4:40 PM on July 3, 2022
"The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions."
I also understand being wary that this will all work out tax-wise. I would speak to a person with your Roth provider to make sure you are doing all the necessary steps to withdraw your 2022 contributions and not anything that was previously in the account. Also, confirm with them that this will not be reported on any tax form. I have a friend who took a Roth withdrawal in 2016 and was issued a tax form with the wrong distribution code on it. She never filed the form because she was told it was not taxable. The IRS did nothing but the tax dept of the state she lives in came back to her 3-4 years later and insisted she pay taxes on it. We had to fill out another form, waste time on calls with both the state and IRS and fax a new form to the IRS. They never sent anything to the state and they ended up seizing the money from her account.
How to document this, to show the IRS no tax is owed on it?
This is why your provider should be able to tell you if they will issue a 1099 for this or not and if they will, what code they will put in boxes 1,2, and 7. Box 1 is the total amount and Box 2 is the taxable amount. If they will show Box 2 as zero and/or a non taxable code in box 7, then you'll need to file that with your taxes. It is not much worse than entering in another W-2. If they don't issue a 1099 at all, I would still watch for one in the mail or our Roth account in early 2023. If one exists, they sent it to the IRS and your state tax dept, if one exists, so you want to file it.
posted by soelo at 4:40 PM on July 3, 2022
Best answer: I am nobody's financial advisor and definitely not yours, but I did this, so I'll relate my experience.
As I understand it, Roths in general allow you to withdraw contributions without tax or penalty (but not earnings)*. I did this last year for a similar reason (not I-bonds specifically). I clicked the scary sounding button asking Vanguard not to withhold anything for taxes.
In my case, I filed an additional form with my 2021 taxes (I think it was Form 8606) in which I had to state the "basis" of my IRA (total amount of the account that consists of contributions, which I was able to get off the account summary on Vanguard's website) and the amount of my withdrawal, to ensure that the amount I was withdrawing was less than the amount I have contributed. In my case, this included some money from past years' contributions. It might be simpler in your case because you're only withdrawing this year's contributions, but you should check elsewhere to be sure. I think this gets more complex if you do it in subsequent years, because you're supposed to keep track of the "basis" over time.
*see, e.g., this Investopedia article.
posted by egregious theorem at 5:46 PM on July 3, 2022
As I understand it, Roths in general allow you to withdraw contributions without tax or penalty (but not earnings)*. I did this last year for a similar reason (not I-bonds specifically). I clicked the scary sounding button asking Vanguard not to withhold anything for taxes.
In my case, I filed an additional form with my 2021 taxes (I think it was Form 8606) in which I had to state the "basis" of my IRA (total amount of the account that consists of contributions, which I was able to get off the account summary on Vanguard's website) and the amount of my withdrawal, to ensure that the amount I was withdrawing was less than the amount I have contributed. In my case, this included some money from past years' contributions. It might be simpler in your case because you're only withdrawing this year's contributions, but you should check elsewhere to be sure. I think this gets more complex if you do it in subsequent years, because you're supposed to keep track of the "basis" over time.
*see, e.g., this Investopedia article.
posted by egregious theorem at 5:46 PM on July 3, 2022
The answer is that your Roth IRA provider keeps track of the total contributions you have made, and as long as you withdraw less, then they will not submit to the feds for taxes. However, a Roth is a container for investments, and you could invest in a I-bond in your Roth container. It’s also meant to be long term, so chasing short-term gains is a bad idea, but that’s not the question.
posted by The_Vegetables at 6:59 PM on July 3, 2022
posted by The_Vegetables at 6:59 PM on July 3, 2022
Best answer:
posted by mbrubeck at 7:28 PM on July 3, 2022
However, a Roth is a container for investments, and you could invest in a I-bond in your Roth container.No, you cannot hold US Treasury savings bonds (Series I or Series EE bonds) in an IRA or 401(k) account. You can only hold them as paper bonds (which are no longer available for direct purchase) or in a TreasuryDirect.gov account.
posted by mbrubeck at 7:28 PM on July 3, 2022
You can already choose to defer payment of taxes on interest on I-bonds until withdrawal (federally; they are not taxable on the state level), so, from a purely taxation point of view, it would actually be foolish and wasteful to allocate any of your limited traditional IRA or 401(k) space to I-bonds. When it comes to Roths, it should be fairly obvious why the government is uninterested in borrowing money directly from you and never taxing you on the interest.
posted by praemunire at 8:55 PM on July 3, 2022
posted by praemunire at 8:55 PM on July 3, 2022
I think what you're asking for isn't a normal withdrawal but a "recharacterization" which your Roth IRA account institution can walk you through. But you'll have to recharacterize any earnings on that contribution as well.
posted by zippy at 8:56 PM on July 3, 2022 [2 favorites]
posted by zippy at 8:56 PM on July 3, 2022 [2 favorites]
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