Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
Withdrawing and recontributing to Roth
Posted by: ClimberDoc, November 2, 2008 08:47PM
I was following a discussion over at Bogleheads:

[www.bogleheads.org]

where it was suggested that one withdraw his 2008 Roth contribution (which has subsequently shrunk to say $3K) and then recontribute the full $5K to the account.

I had two questions:

1) Is this legit?

2) Is there any legal way to deduct the losses?

Thanks in advance, you guys are great.

dreaming
Posted by: jainen, November 2, 2008 09:04PM
>>withdraw... and then recontribute<<

Although I share everyone's anguish at the economic downturn, professionally I am rather enjoying all the creative ideas people are dreaming up.

Re: Withdrawing and recontributing to Roth
Posted by: Alan S., November 2, 2008 10:06PM
This has always been possible and is nothing new, although the market losses have led to a "rediscovery" of the basic rules.

First of all, the treatment of the withdrawal of excess contributions and the optional return of contributions is identical. However, you cannot just request a distribution. You must report to the custodian that you are requesting a return of your current year contribution because this gets coded differently on the 1099R. The allocated earnings or losses must be calculated, and the result is what you receive back. If there are earnings, they are taxable and subject to penalty. If there are losses, you just get back less than your original contribution. When the IRS gets a 1099R showing the return of contributions, the possibility of a new contribution is produced. When the reporting period is closed, all the IRS cares about is that you did not exceed the maximum allowed contribution for the particular year.

If you just withdraw contributions, the 1099R will be coded as an early distribution which is different than a withdrawal of the current year contribution or correction of an excess contribution. If you take your distribution that way, you have still used up your allocation for the year and cannot contribute more. If you do, then you have yet another excess contribution that must be corrected.

However, there is NO way to deduct losses unless you close all of your Roth accounts and do not contribute again until the following year. You may then qualify for a misc itemized deduction subject to the 2% of AGI limit for your loss, which is the difference between your total contributions and the lesser amount you received. The loss can be erased by the AMT. In summary, if you can deduct the loss, you cannot recontribute until the following year. But if you just request a return of the current year contribution only, you can contribute again in the current year up to your maximum limit.

Note that it is commonplace for a taxpayer to make two contributions in error or to contribute and then find out their income was too high to qualify. The necessary corrections or additional contributions can be made in any order, but each correction requires an earnings calculation on the account that holds the specific contribution being corrected. At year end, your remaining contributions in total cannot exceed the allowed amount, or you incur a 6% excise tax on the amount of excess, and that 6% is due for each year the excess is not corrected.

Re: Withdrawing and recontributing to Roth
Posted by: supertreat, January 17, 2009 05:52PM
"The necessary corrections or additional contributions can be made in any order, but each correction requires an earnings calculation on the account that holds the specific contribution being corrected."

So in other words. One could make an excess $5000 contribution for 2008 and then remove the previous one before tax filing deadline and there would be no penalty?

Re: Withdrawing and recontributing to Roth
Posted by: Alan S., January 17, 2009 08:28PM
There would be no penalty unless there were earnings allocated to the contribution being corrected.

While the statement is correct when more than one IRA account receives the contributions, it needs to be clarified if only one IRA receives multiple contributions. In that case, the contributions received last must be the ones removed first and the earnings calculation done accordingly for the exact contributions being removed. Therefore, if you have this situation and want the least amount returned from the IRA due to heavier losses on the first contribution, make the new contribution to a different IRA account or IRA custodian.

If you do not want to use more than one IRA account, then correct the first contribution BEFORE making the second one.

Re: Withdrawing and recontributing to Roth
Posted by: banff50, January 18, 2009 07:09AM
I am also considering removing my 2008 contribution and then contributing again. I guess the best way to do this would be with the excess contribution form? And it's probably a good idea to do before 4/15 ? And I'm assuming this won't be too much of a tax hassle if you have nothing but losses and its all Roth after-tax money anyway.

Re: Withdrawing and recontributing to Roth
Posted by: Alan S., January 18, 2009 08:19PM
If you are going to make another contribution for 2008, it MUST be no later than 4/15/09.

Return of your prior Roth contribution must be requested according to the procedures required by the IRA custodian. You might even be able to order it by phone or on line.

There will be no tax liability if you have losses, but you still must report the activity to the IRS with your return in an explanatory statement.



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