IRA Rules

Archive for November, 2009

Question: IRA ROTH DISTRIBUTIONS TAX’S AND PENALTIES?

I opened an IRA Roth 2007 with $1000, I didn’t contribute to it in 2008 but instead withdrew $900 from it in Oct 2008 for disability reasons. Its past the 60 day rule for returning it back to the account. Will their be taxes and penalties on it? If so how much?

Answer: Dear x1: The Roth IRA is a different animal and has some special features. First the contributions you put in are after tax, which means they have already been taxed. So you can with draw your contributions tax free anytime even a day later. Now the interest or appreciation is a different story. By rule there is a 5 year waiting period for these. As in most transactions there is a rule (FIFO), first in first out. Contributions are in first, so they all come out first. You will be receiving a 1009R so wait for it.
This advice was prepared based on our understanding of the tax law in effect at the time it was written as it applies to the facts that you provide. Click on my profile to read more.
Errol Quinn Enrolled Agent Master Tax Advisor

Roth IRA: Building a Tax-Free Retirement on Money Smart Radio

Roth IRA Tax Rules are somewhat more favorable for higher income earners than traditional IRA Tax Rules. Under Roth IRA Tax Rules, individuals can contribute funds into a Roth IRA account now and withdraw the money tax free later. Roth IRA Tax Rules are different from traditional IRA Tax Rules mainly in two areas: time to withdrawal and tax treatment of Roth IRA contributions.

Many investors open a traditional IRA without considering if a Roth IRA account would be more beneficial. When opening an individual retirement account, you should make sure that you understand Roth IRA Tax Rules. For some, Roth IRA Tax Rules can be complicated to understand. Ask your financial advisor to explain the concept of Roth IRA Tax Rules to you, if you have a financial advisor. Otherwise, there are plenty of resources around, even on this Ira Rules website, to get your familiar with Roth IRA Tax Rules. Understand Roth IRA rules, Roth IRA distribution rules, and Roth Ira Withdrawal Rules help you understand Roth IRA Tax Rules.

Roth IRA tax rules on the conversion of a Traditional IRA to a Roth IRA

Under some circumstances, Roth IRA rules allow the conversion of a Traditional IRA account into a Roth IRA account. The income limit that dictates whether a Traditional IRA can be converted into a Roth IRA account is $100,000 under the Roth Ira Tax Rules. That means, if your income is $100,000 or less, you can do a Roth Conversion or convert your Traditional IRA account into a Roth IRA account legally under the Roth Ira Tax Rules.

The $100,000 Roth IRA conversion rule applies to singles as well as married couples, and you can’t convert an IRA to a Roth at all if you’re married filing separately. For more information about the Roth Ira Tax Rules for converting a Traditional IRA account to a Roth IRA account, see IRS tax Publication 590 Individual Retirement Arrangements, especially page 26.

Roth Ira Tax Rules on deducting IRA losses

When you have losses in your individual retirement account, Roth Ira Tax Rules could come in handy. Many people, however, are confused as to whether they can deduct losses from their IRA accounts under this Roth Ira Tax Rules. The answer is that you can only deduct realized losses under Roth Ira Tax Rules. If your losses in your IRA accounts are not yet realized, then you cannot deduct the losses.

How to deduct realized losses from a Roth IRA account under Roth Ira Tax Rules?

If you liquidate your Roth IRA individual retirement account and end up with less than you contributed, then you have a realized loss. You can deduct that realized loss under the Roth Ira Tax Rules as deductible miscellaneous expenses. Some people think they can deduct Roth IRA losses as capital loss, this is not the case.

Miscellaneous write offs are tax deductible to the extent that they exceed 2% of your adjusted gross income (AGI). For more information on miscellaneous write off tax deductible items, consult IRS publication 529.

Question: Roth IRA – Home Buyer?

Say, I invested $20000 into Roth IRA. Then the following year I have $21000 in the account and I am purchasing a my first home on that same year.

So I proceed to take $21000 out and I understand the 5-year rule is not met.
However, since I am purchasing a new home, should it be considered a “qualified distribution” and will not subject to taxation & penalty?

Please elaborate your answer, thank you!

Answer: There is a little known tax rule:
You can take out money out of a ROTH within the first 5 years without the 10% penalty
IF you use it for the purchase of your first home.

Talk to your broker or account manager.
See if you can re-characterize and put that money back in your ROTH.
Then, you will need a special tax form to take the money out of your roth for your first home purchase.
Please talk to your advisor – and fix this mess.

Google: Taking money out of a roth without penalty

http://www.fool.com/money/allaboutiras/allaboutiras12.htm

Motley fool – funny name for a financial site – very good site to read.
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Roth IRA Conversions – The 5-Year Rule