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Old 04-02-2008, 01:36 AM
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Roth IRA – Withdrawal and Penalty

Hi,

I have question about early withdrawal of Roth-IRA.

Last year 2007 I was planning to buy house and taking that in consideration I withdrew my Roth IRA prematurely (Before 5 yrs of opening it). About $4100. But after housing market meltdown I didn’t buy house. Now I have this money sitting in my saving account.

I have couple of questions based on this:

1. Do I have to pay penalty or tax in 2007 taxes for early withdrawal?
2. Can I invest this amount back into Roth-IRA in 2008 before Apr-15-2008 to save on 2007 taxes or penalty?

Thanks for your help,

Lee



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Old 07-14-2008, 12:22 PM
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ROTH IRA Withdrawal and Penalties

WHAT ARE THE ROTH RULES:
Taxpayers who meet the required income guidelines are eligible to make an after-tax, nondeductible contributions to their Roth IRAs. Clearly, the Roth's major advantage is that earnings on the account are tax-free, and the withdrawals can be tax-free also provided they meet 2 stringent conditions. These are as follows;

1. At the time of withdrawal, the accountholder must be at least age 59 ½ or meets specific conditions set by the Internal Revenue Service (IRS), known as "exceptions."

2.At the time of withdrawal, the funds being withdrawn must have been in the account for at least five years.

Any "Withdrawals" made by the accountholders that meet those conditions are called "qualified distributions."

Any withdrawals made by the accountholders that fail to the above test are called non-qualfiied distributions. The IRS rules state that these so called non-qualified withdrawals will be subject to a 10% early withdrawal penalty." Furthermore, the IRS rules state that the accountholders who make non-qualified withdrawals are required to pay taxes on any withdrawn earnings, based on their regular income tax rate.

Thus, in your case you have made a non-qualified withdrawal that would subject you to both the 10% penalty and subject your earnings from the Roth account to your regular income tax rate.

I have not read any specific provision in the tax code that would allow you to reinvest this money back into Roth-IRA before Apr-15-2008 to save on 2007 taxes or penalty. So, my conclusion is that it is unlikely that you would be able to avoid any of these taxes or penalites.

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