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  1. #1
    Join Date
    Jan 2014
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    142

    Default Reporting an Early Distribution from a Roth IRA

    OK I have a friend who has a question. My friend is un employed, and has been for nearly a decade and as far as his income and assets are concerned for the past ten years - he is legally below the poverty level. I think he has just less than 5 thousand dollars to his name in a ROTH IRA. Friend is single and lives with another friend, has been single all his life.

    Years ago, when friend's parent passed away, the mother left my friend a modest inheritance. It was under 100 thousand dollars which my friend was told by both the parents' probate attorney and a few CPA's, that the inheritance was not taxable and that there is no requirement to claim it as income. I think at that time - within the past ten years - one had to get an inheritance of over a half million I think in order for it to be taxable? Is that correct?

    Anyway the year the first parent passed away, friend visited his parents financial adviser and the adviser advised to set up both a ROTH IRA and also a seperate brokerage account and deposit part of that inheritance money into both the ROTH and the seperate brokerage account. A year later the friends step father passed away and also left a small inheritance well below 100 thousand. So my friend also deposited a part of that inheritance money in the account. The year this second deposit occured, friend had ZERO wages, salary, tips etc and was un employed. The year the mother died, the friend had maybe 1,500 dollars in income and that was it. So starting from just prior to the actual date that both the ROTH and the seperate brokerage accounts were set up, up to today's date, he has had only about $2,500.00 in income. in Ten Years. Most of the years between the establishment of the accounts and present he had no income and filed no income tax returns - no W-2's nor any 1099's are on file with the IRS during that time other than the 2,500 bucks. I think only maybe two returns were filed in the past ten years - the two years my friend had a couple of short term jobs that lasted maybe a week or so.

    So A few years later it was learned that the friend should not have put the money into the ROTH because at the time was un employed and had no income. He learned that one is not supposed to put money into a ROTH unless one makes above a certain level of income. So after finding out that the money should not have been put into the ROTH IRA he pulled several thousand dollars out of the account because friend found he was in error to put it in the ROTH and thougt he was doing the right thing. He got the figure he was supposed to take out of the ROTH, from the tax preparer, after bringing it to the tax preparer's attention and he withdrew it. This was partly an error on tax preparers account and partly also bad advice from the financial adviser - I will not mention their names here but they are huge national brands.

    So anyway no W2's were filed by any company, nor any 1099 forms for self employment in the year he pulled the money out. Friend had only about 1500 bucks in income the year he put the money in, and was un employed the year he took the money out.

    So some stock was sold. The stock was sold at a loss so there was no profit gained by the sale and distribution from either the ROTH account or the brokerage account.

    My question is - if the money that went into both the ROTH account and the seperate brokerage account was solely from a non taxable source (inheritance), during years in which there were no wages, salaries, tips, cash income etc. and - if the money taken out resulted from the sale of securities which were sold at a loss, does the friend still owe an income tax return for the year in which friend had no income and no capital gains? Given that A - all the money deposited into both accounts were from non tax able inheritance and B - there were no capital gains (actally losses) from the withdraws? Also would there be any interest and or penalties involved?

    Or...is it just enough to supply a trade ticket to the IRS showing that there were no capital gains profits gleaned from the sale of securities?

    As of this date the non IRA brokerage account is closed and the ROTH still exists with just a few thousand dollars in it and no contributions to it nor any withdraws have been taken out of the ROTH for at least 6 years - since the distribution in question was done. It is just sitting there and actually there is less money in it now than there was several years ago.



    Thanks.

  2. #2
    Join Date
    Oct 2006
    Posts
    6,153

    Default Re: Roth IRA Early Distribution - Non Filing of Return Issue

    When stocks are sold (that are not part of an IRA or 401K) it is necessary to report the stock sales on your tax return, report the cost basis, and report either a capital gain or a capital loss. So yes, most likely your friend needs to be filing a tax return. If he had losses he won't owe any tax, but he does need to file the return.

  3. #3
    Join Date
    Jan 2014
    Posts
    142

    Default Re: Roth IRA Early Distribution - Non Filing of Return Issue

    Is it also true that if there are losses, and no income (and therefore no tax), that there will also be no interest or penalty assessed for a late filing?

  4. #4
    Join Date
    Sep 2013
    Posts
    833

    Default Re: Roth IRA Early Distribution - Non Filing of Return Issue

    It seems there needs to be a return made for previous years too. There is a penalty for the overcontribution to the Roth of 6% a year.
    So A few years later it was learned that the friend should not have put the money into the ROTH because at the time was un employed and had no income. He learned that one is not supposed to put money into a ROTH unless one makes above a certain level of income. So after finding out that the money should not have been put into the ROTH IRA he pulled several thousand dollars out of the account because friend found he was in error to put it in the ROTH and thougt he was doing the right thing.

  5. #5
    Join Date
    Jan 2014
    Posts
    142

    Default Re: Roth IRA Early Distribution - Non Filing of Return Issue

    Quote Quoting Welfarelvr
    View Post
    It seems there needs to be a return made for previous years too. There is a penalty for the overcontribution to the Roth of 6% a year.
    What if the source of the contributions were from money that was originally non taxable, from a person whom for the past ten years has been below the poverty level? WAY below the poverty level...

    By the way, I would prefer if a tax attorney would answer the above question - a person experienced in dealing with the IRS on a regular and ongoing basis...

    More to the point - penalties would imply a profit or gains were made and not reported - which in this situation is not the case...

  6. #6
    Join Date
    Jun 2006
    Location
    Massachusetts
    Posts
    17,815

    Default Re: Roth IRA Early Distribution - Non Filing of Return Issue

    When you post on an open volunteer forum, you do not get the luxury of dictating who responds. If it is that important to you to have no one but tax attorneys answer, then you also get the privilege of paying for them.

  7. #7
    Join Date
    Sep 2013
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    833

    Default Re: Roth IRA Early Distribution - Non Filing of Return Issue

    Quote Quoting nadsab
    View Post
    What if the source of the contributions were from money that was originally non taxable, from a person whom for the past ten years has been below the poverty level? WAY below the poverty level...

    By the way, I would prefer if a tax attorney would answer the above question - a person experienced in dealing with the IRS on a regular and ongoing basis...

    More to the point - penalties would imply a profit or gains were made and not reported - which in this situation is not the case...
    It is a tax/penalty on the excess contribution and has nothing to do with the tax-ability of the funds used. See Publication 590.

    In part:
    Excess Contributions

    Generally, an excess contribution is the amount contributed to your traditional IRAs for the year that is more than the smaller of:

    • $5,500 ($6,500 if you are age 50 or older), or
    • Your taxable compensation for the year.



    The taxable compensation limit applies whether your contributions are deductible or nondeductible.
    Contributions for the year you reach age 70 and any later year are also excess contributions.
    An excess contribution could be the result of your contribution, your spouse's contribution, your employer's contribution, or an improper rollover contribution. If your employer makes contributions on your behalf to a SEP IRA, see chapter 2 of Publication 560.
    Tax on Excess Contributions




    In general, if the excess contributions for a year are not withdrawn by the date your return for the year is due (including extensions), you are subject to a 6% tax. You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. The tax cannot be more than 6% of the combined value of all your IRAs as of the end of your tax year.
    The additional tax is figured on Form 5329. For information on filing Form 5329, see Reporting Additional Taxes , later.
    Example.
    For 2013, Paul Jones is 45 years old and single, his compensation is $31,000, and he contributed $6,000 to his traditional IRA. Paul has made an excess contribution to his IRA of $500 ($6,000 minus the $5,500 limit). The contribution earned $5 interest in 2013 and $6 interest in 2014 before the due date of the return, including extensions. He does not withdraw the $500 or the interest it earned by the due date of his return, including extensions.
    Paul figures his additional tax for 2013 by multiplying the excess contribution ($500) shown on Form 5329, line 16, by .06, giving him an additional tax liability of $30. He enters the tax on Form 5329, line 17, and on Form 1040, line 58. See Paul's filled-in Form 5329, later.


    Yes, I know you are talking about a Roth IRA.
    http://fairmark.com/retirement/roth-...-to-roth-iras/

  8. #8
    Join Date
    Jan 2014
    Posts
    142

    Default Re: Roth IRA Early Distribution - Non Filing of Return Issue

    Quote Quoting cbg
    View Post
    When you post on an open volunteer forum, you do not get the luxury of dictating who responds. If it is that important to you to have no one but tax attorneys answer, then you also get the privilege of paying for them.
    Were my friend able to hire one, this would not have been posted here, the point would be moot, the matter resolved long ago and would not have been an issue if he had the money to hire a tax attorney.

    What you are implying is that the IRS will be taking all of the money my friend has left in the world - after having only about 2,500 dollars in income for the past year and being in poverty for the past several years prior to getting hit with a tax bill. Thanks so much for your empathy and understanding.

  9. #9
    Join Date
    Sep 2013
    Posts
    833

    Default Re: Roth IRA Early Distribution - Non Filing of Return Issue

    Quote Quoting nadsab
    View Post
    Were my friend able to hire one, this would not have been posted here, the point would be moot, the matter resolved long ago and would not have been an issue if he had money. So basically this forum on tax law is run by armchair five minute tax experts who google for answers which is something that i could have done LOL.
    Google would not have given you the correct answer? The correct answer is the correct answer no matter if it comes from a tax attorney or a five-minute expert.

  10. #10
    Join Date
    Jun 2006
    Location
    Massachusetts
    Posts
    17,815

    Default Re: Roth IRA Early Distribution - Non Filing of Return Issue

    I am not implying anything of the kind. I am telling you straight out that you don't get to dictate who answers. If you want a tax attorney to answer the question, make an appointment with one and pay the bill. If you want a free assessment from a volunteer forum, you take what you get.

    Do not put words in my mouth.

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