"Back in 1991 my Wife won a personal injury lawsuit. Using some of that money she opened a Roth IRA. She never contributed over the years, it just sat there. Finally in 2013 she cashed it in. Now, (2015) The IRS is wanting to tax her on the full withdrawal. Would the original investment not be tax free when taken out?.She is not yet 59.5 years old. If she owes the tax so be it, just wanting some advise please." Her original investment was $2000.00 in 1991, she withdrew $2225.00 (all that was in there) in 2013. IRS says she owes tax on full amount. She swears the bank told her only what the IRA earned would be taxed, not the original investment, if it was cashed out.======>> The compensation for her physical/personal Injury is Not Taxable, so her contribution to the R-IRA was NOT after tax contribution. .As the withdrawal is made before age 59 1/2 , she needs to pay tax on her earnings 0f $225 and nontaxable contributions of $2K..
. You can contact an Enrolled Agent or a CPA doing taxes in your local area for more help in detail.