[Jeff]

Roth IRA question. I was certain Vanguard told me that contributions to a Roth IRA could be withdrawn anytime, for any reason, tax and penalty free. Growth/gains would be taxed and penalized for early or unqualified withdrawals, but not contributions. My accountant just told me that while Vanguard may say that, the IRS does not.

I know not to look to the internet for advice, but does anyone have a clear answer about this? When I google it, all the investment sites say contributions are tax free/penalty free.

IRS does not say the same thing. Frustrating!

My accountant contacted me a few hours later after checking on this further, and acknowledged that I was right.

She was getting hung up on the IRS language about Qualified Distributions, which these aren’t, but the IRS site was a little confusing about making a clear statement about contributions.

I sent her a few screenshots from some of your references, and you were all very helpful in getting this resolved.

Thanks community!

[Jordan]

Keep in mind that if you do withdraw, then you’re effectively selling any shares you have in that account at current market value, and have no opportunity to “refill that hole”.

Some say you’re stealing from your future self.

[St Patrick]

Tax attorney here. You can withdraw the contributions at any time, for any reason, without tax or penalty.

You will receive a 1099-R for the year(s) of the distribution(s). Simply indicate on Form 8606 that the distributions are all a return of basis, and thus nontaxable.

[Amy]

Yikes – your accountant is wrong. I listen to the Clark Howard podcast and he regularly answers questions about this- dollars contributed may indeed be withdrawn without penalty.

Earnings cannot be.

And getting funds back in are of course constrained by Annual limits …so if you take out say 20k you can’t get that money back in except by 6,500 per year.

I would be looking for a new accountant.

[Joseph]

You have to wait at least 5 years after the account was first opened to withdraw your principal penalty free.

[M.m. Jones]

There are a bunch of rules about Roth Withdrawal, but short & sweet.

Because you already paid taxes on the money you’ve contributed to a Roth IRA, you can withdraw your contributions any time, without penalty.

The key word there is contributions — the money you put into the account. Different rules apply to your investment earnings.

[Corey]

Because it is a Roth, you paid the taxes when you made the initial contribution. Therefore, you can take it out without paying tax on the withdrawal. Technically not tax free, it’s just that you already paid the tax.

Maybe you’re talking about doing both transactions in the same year. Maybe that’s why your accountant says that.

[Joel]

Get a new accountant. He’s wrong. Have him read the Ordering Rules for Non-qualified Roth IRA distributions on page 33 of IRS Pub 590-B. It’s there clear as day.

Also if he’d ever bothered to complete Part III of Form 8606, he’d know Vanguard is right. Hell, accounting for the Ordering Rules is the entire point of Part III.

[Joshua]

Run over to the Wealthy Accountant’s website and check out his recommendations for tax pros so you can get connected with a like-minded CPA that would know all about these things.

[Lillian]

Alright, so I’m a licensed financial rep, and I CANNOT tell you how many people I have talked to on the phone who are tax advisors, or were told something by their tax advisor, that is COMPLETELY wrong. It’s really concerning.

That being said, your accountant is 100% wrong. The rules do get confusing and it’s easy to mix things up, but here’s what it boils down to:

1) Contributions to a Roth IRA can be withdrawn tax/penalty-free at any time – regardless of how old the account is and how old the individual is.

2) Any *earnings* on contributions withdrawn under age 59.5 would be penalized, no 5 year rule exempts this penalty if under 59.5yo.

3) When OVER 59.5 years old, the earnings can be withdrawn tax/penalty free *once the IRA has aged 5 years.*

And if your accountant needs an IRS resource, right here is where it specifies contributions are not taxed (it’s not as clearly stated as I’d like, but it says it)

READ

[Author]

Posts