Roth IRA tax question

[repoman0]

This might be a little esoteric for this forum but there are plenty of investment nerds here, so why not try.

Let's say I withdrew the equivalent of 3 years of contributions to have extra cash on hand to buy a house. This took place end of last calendar year and I had fully funded the IRA for 2017 early last year. I then put back just under 2 years worth of contributions, ostensibly under the 60 day rollover rule about 59 days later, so in the end I spent just over a year's worth of contributions on the house process. I now realize there is a special rule to withdraw current year contributions and earnings, as long as I pay normal income tax on the earnings. Also, supposedly I can legally recontribute that 2017 money now that I have a little more cash on hand.

My question is, can I finagle reporting so that my initial 3 year withdrawal counts as current year+earnings, plus slightly under two years of prior contributions -- in addition counting my 59 days later contribution as a prior year rollover, allowing me to redo my 2017 contribution now. It seems doable, guessing it will become clearer once 5329 and 8606 forms become available on the free file site. Can anyone think of a reason the IRS would frown upon this??

 

[Zeze]

I wouldn't mess with it unless a proper CPA advises you.

 

[repoman0]

I wouldn't mess with it unless a proper CPA advises you.

There are proper CPAs on this forum! How perfect.

 

[Tweak155]

I'm slightly confused, because with a Roth IRA, whatever you contribute can freely be withdrawn from my understanding, since it is post tax money. It is the gains that have stipulations surrounding them. Read through the rules here:

https://www.schwab.com/public/schwa.../understanding_iras/roth_ira/withdrawal_rules

 

[repoman0]

I'm slightly confused, because with a Roth IRA, whatever you contribute can freely be withdrawn from my understanding, since it is post tax money. It is the gains that have stipulations surrounding them. Read through the rules here:

https://www.schwab.com/public/schwa.../understanding_iras/roth_ira/withdrawal_rules

True, which is why I was using it to save for a house in the first place. If I leave everything as is, I pay zero taxes on the 1+ year worth of money I took out for the house, and all is basically well regardless. On the other hand, if my proposed scheme works, I pay a small amount of normal taxes on just the earnings of my old 2017 contribution over a period of about 9 months, but I get to redo the 2017 contribution and have an extra $5500 in there that would otherwise be lost to the taxable investments world. Basically the full 3 years worth of contributions makes it back into my account since I didn't have enough cash to do so within the 60 day rollover window.

 

[boomerang]

Do you live in an area declared a disaster area? Harvey, Irma, Maria and perhaps others? If so, there are special rules in play that could work in your favor. Sorry, but I don't know any details, you'd have to research that.

 

[jtworldwide3]

you can take out whatever you have put in. So assuming you had made 3 years of contributions into your Roth all we be good. You already paid tax on that.
However, if you got into the earnings its not just a small income tax. The earnings will show as income which could bump you up into another tax bracket and be a large impact and you have to pay a 10% penalty on top of that for taking it out.

I would almost promise you if you tried to do your proposal you would get dinged. Mine contribution went over by 10 bucks one year and i got a nasty letter about it.

 

[repoman0]

you can take out whatever you have put in. So assuming you had made 3 years of contributions into your Roth all we be good. You already paid tax on that.

I have at least three years contributions, so could easily choose to just call it a day and not pay any tax.

However, if you got into the earnings its not just a small income tax. The earnings will show as income which could bump you up into another tax bracket and be a large impact and you have to pay a 10% penalty on top of that for taking it out.

There is a rule that you can withdraw current year contribution with all earnings and only pay normal income tax on the earnings with no penalty. Then the IRS treats it as if that contribution was never made, so it can be made again before the tax deadline. That's what I want to do, while treating the rest of the distribution as withdrawing prior year contributions. Then I claim that I put the prior year contributions back within the 60 day rollover rule, leaving me free to make my 2017 contribution again.

Basically it seems to me that the tradeoff to allow this to happen is I would need to pay income tax on whatever earnings I made on my first 2017 contribution, which is easily worthwhile.

I would almost promise you if you tried to do your proposal you would get dinged. Mine contribution went over by 10 bucks one year and i got a nasty letter about it.

Why though? It should be legal IMO, whereas $10 extra is not. Once the 5329 and 8606 come online in freefile I'm going to fill it out this way and see what happens.

 

[repoman0]

Do you live in an area declared a disaster area? Harvey, Irma, Maria and perhaps others? If so, there are special rules in play that could work in your favor. Sorry, but I don't know any details, you'd have to research that.

Nope, just boring old safe New England.

 

[Scarpozzi]

Don't forget the 5 year rule. Your contributions have to be in the Roth for 5 years to get the tax benefit, otherwise if you're under 59.5 years old, they'll hit you with the 10% early withdrawal penalty.

I'm in a weird place because I used extra money I had from a loan to fund my Roth and it's tripled in value because of some trades I've made along the way. I thought I could just pull that initial contribution out, but it wasn't that simple. It would have cost me about half of my initial contribution in penalties. I'm needing the cash for construction funding on my home. I ended up refinancing two vehicles I'd already paid off at 1.5% and 1.7% interest for 3 years. This allowed me to snag $36k in cash on a 3 year loan for the low cost of $1k interest over the life of the loan. It made more financial sense than even doing a HELOC.

....added bonus is that if any of my vehicles get totaled, I'm off the hook thanks to insurance and get to buy a new car! I know that sounds warped, but I'm essentially doing a secured loan on an insured asset. It's the best option if you need to come up with low-interest cash and don't want to deal with lost opportunity in the Roth.

 

[repoman0]

Don't forget the 5 year rule. Your contributions have to be in the Roth for 5 years to get the tax benefit, otherwise if you're under 59.5 years old, they'll hit you with the 10% early withdrawal penalty.

Only on earnings -- I had to check this many times. However the IRS instructions are very clear that any and all contributions can be withdrawn at any time with no additional taxes or penalty .. see Part III, line 22, which is immediately subtracted from your distribution:

https://www.irs.gov/pub/irs-dft/i8606--dft.pdf

I thought I could just pull that initial contribution out, but it wasn't that simple.

It should be that simple? Try filling out the 8606, you should find that you owe zero in taxes and penalties. I'd be curious to hear why not.

 

[Ken g6]

Yeah, I'm pretty sure you can get your contributions out without penalty. I'm not sure if you can put them back, or if that's considered another contribution, and over the annual limit.

But I'm not an accountant, although I might be "certifiable". 😛

 

[repoman0]

Called Vanguard on this, no dice re: redoing the 2017 contribution. They think that the current year contribution still counts and isn't erased if it's withdrawn. I'm not sure if that's a Vanguard policy or strictly following the Federal rules because I haven't seen anything concrete in the actual 590-A and B IRA documents either way. Doesn't matter though if they won't let me do it 😛

Makes my taxes and life easier in general I guess so screw it. I wasn't looking forward to figuring out my exact earnings on my 2017 contribution money because I had sales and purchases throughout the year on the entire pool of money, not just 2017. In the end this was supposed to be a house savings fund and I managed to only spend a year's worth of money rather than all three, so calling it a win even though Vanguard denied me.