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Roth IRA Contribution Basis Withdrawal

Forum|Forum|2 years ago
November 7, 2023
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Hello,

I have a question about Roth IRA early withdrawals. I am asking this for a family members situation:

- First opened a Roth IRA account and deposited $100 for the year 2022.

- Received the fidelity $100 bonus (labeled as earnings)

- Transferred the money out of the roth ira of $200 (mistake i know)

- Later, contributed $50 for the year of 2023.

I know that they are subjected to early withdrawal penalty and taxes. When they later file for taxes, it will ask on form 8606 line 22 for the basis in Roth IRA contributions.

What would the Roth IRA contribution basis be? I am assuming the basis would be $100 since they took it out before putting in the $50 later. Which would mean they would pay the penalty and taxes on the $100 from earnings. ($100(contribution)+$100(earnings)=$200)

Would the Roth IRA contribution basis be $100 or $150?

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Best answer by dmertz

Since you mention Form 8606, I assume that your Roth IRA distribution is a nonqualified distribution. Assuming that the distribution occurred in 2023, the Roth IRA contribution basis on line 22 of your 2023 tax return would be $150. If you are eligible and contribute another $50 before the end of 2023, your basis will be $200 and your $200 distribution will be free of tax and penalty, no earnings distributed. For the purpose of determining the taxable amount of distributions, the distributions are treated as occurring on December 31 of the year in which the distributions occur.

If it has been less than 60 days since your $200 Roth IRA distribution, you can roll over some or all of that distribution. However, that would be subject to the one-rollover-per-12-months limitation, so if your funds are limited and you would not be maxing out your 2023 contribution limit, new contributions would probably be better than doing the rollover.

A

Anonymous_

Employee

No text available

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dmertzAnswer

Employee

Since you mention Form 8606, I assume that your Roth IRA distribution is a nonqualified distribution. Assuming that the distribution occurred in 2023, the Roth IRA contribution basis on line 22 of your 2023 tax return would be $150. If you are eligible and contribute another $50 before the end of 2023, your basis will be $200 and your $200 distribution will be free of tax and penalty, no earnings distributed. For the purpose of determining the taxable amount of distributions, the distributions are treated as occurring on December 31 of the year in which the distributions occur.

If it has been less than 60 days since your $200 Roth IRA distribution, you can roll over some or all of that distribution. However, that would be subject to the one-rollover-per-12-months limitation, so if your funds are limited and you would not be maxing out your 2023 contribution limit, new contributions would probably be better than doing the rollover.

J

joetyyangAuthor

Wow, this was very informative and helpful. Thank you!

So if another $50 was contributed to the account (yes eligible), it would be like the earnings aren't taken out, correct? Since the contribution basis would be $200. Sorry, new to this, I did not know that distributions were treated as occurring on December 31st. This answers my question because the distribution did occur in 2023.