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I recently received a letter from the IRS based on my taxes for 2015. I believe I did not understand the proper workings of a Roth IRA. I was under the impression I could pull my money out and only report any distribution increases on my taxes. For instance assume I had $1000 bucks in my Roth IRA. Let's say I only gained 10 bucks on it giving me $1010. I previously thought a Roth IRA allowed me to withdraw my original $1000 without any penalty but if I were to withdraw any gains and not report it on my taxes that would be wrong.

In any event, I only had around $10000 on a new Roth IRA and at the time I ran into some financial issues. I wasn't smart and had not saved in an emergency fund at the time (I know this was rather stupid of me considering I was putting in 15% of my salary in my 401k and putting money into my Roth IRA). I don't need tips or a lesson on how this is important - lesson was learned at the time.

In any event in 2015 I had withdrew around $4750 of my own money (of which none of this had any gains) from my Roth IRA. I did not report this as income because I thought this was already taxed, already my money, and no gains.

So yesterday I got a letter from the IRS stating I owe $1950 back to them. Did I mess up? Was I supposed to report this as income? If I honestly messed up I will definitely pay it as I don't want to mess with the IRS and lesson learned. In other words if I can avoid this I'd like to but I am all for doing the right thing.

EDIT

Back in 2015 when I first started doing my taxes I did not pay attention to form 1099-R. I was an idiot and learned from my mistake. I just went to fidelity's site and downloaded my 1099R and here is what it gave me:

enter image description here

I believe I did not put this value on my form. I am confused now who I need to contact or how I should fix this. Should I contact Fidelity or the IRS?

smci
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JonH
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    Did you use the info on the 1099-R when filing your 2015 return, or just ignore it? – Hart CO May 12 '17 at 14:59
  • @Dunk - You misread the question. I am not pulling out any gains. – JonH May 12 '17 at 17:16
  • If your $1000 earned $10, what is the difference between pulling out the $10 you got from "gains" and another $10 from the original $1000 dollars? – Michael Richardson May 12 '17 at 17:43
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    @MichaelRichardson The gains are taxable, the original 1000 has already been taxed. – Xalorous May 12 '17 at 19:31
  • @Xalorous Right. I was asking if you took $10 out, how could you tell if you took it from the gains or from the original. From the other comments and answers, it is clear that taking out anything up to $1000 would always count as taking from the original. – Michael Richardson May 12 '17 at 19:53
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    You didn't screw up on the IRA withdrawal. You also didn't make a huge mistake using the Roth IRA as part of an emergency fund. I mean obviously it reduces your retirement savings somewhat, and obviously the money you took out will no longer compound and grow with the market tax free, and that's a shame. But it's not a "screw-up" IMO. You only messed up the tax paperwork, no big. File it correctly and done. – Harper - Reinstate Monica May 13 '17 at 23:34
  • Isn't there a requirement that a Roth IRA be open for 5 years before you can take a tax free distribution? – Jen Deal May 14 '17 at 12:57
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    @JenDeal: as (nearly) correctly quoted in HartCO's answer, you can take out Roth contributions (which were post-tax when made) tax-free anytime; you need 5 years AND age 59.5 (or disabled or deceased or certain special cases) to get earnings tax-free. – dave_thompson_085 May 14 '17 at 19:49

5 Answers5

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There could be a few reasons for this, my first guess is that you didn't report the distribution on your return (indicated on line 15 of your 1040, pictured below), the IRS got a copy of the 1099-R, and assumes it's all taxable (or maybe the 1099-R indicates the full amount is taxable). If a 1099-R doesn't have an amount populated for 'taxable amount' it doesn't mean the distribution isn't taxable, and without any indication that it's not taxable the IRS assumes it is.

It's not taxable if it's a withdrawal of your contribution.

Here's a snippet from How to Calculate the Taxable Amount of an IRA Withdrawal:

Withdrawals from a Roth IRA
Since Roth IRA contributions are made on an after-tax basis, qualified withdrawals are completely tax-free. A "qualified" Roth withdrawal includes the following:

  • A withdrawal of your original contributions at any time, for any reason.
  • Any withdrawal from your account after you turn 59 1/2 years old and your account has been opened for five years or more.

If your 1099-R indicates a taxable amount, then you might need to contact the issuer to understand why. If it does not indicate a taxable amount and you failed to record the distribution on your return, you just need to file an amended return that shows the distribution on line 15a and shows no taxable amount on 15b along with a completed Form 8606.

You may not need additional documentation to support of your claim that it's not taxable, but if you do it would be any statement showing that your contributions over the years exceed your withdrawal.

What a 1040 with a non-taxable IRA withdrawal would show: 1040_IRA

Note: There'd also be a completed Form 8606, the 1040 lines above just show if it was entered in.

The easiest path forward is probably to file an amended return using turbotax since you filed with them originally. I haven't dealt with an IRS letter in a few years, I can't recall if you need to contact them or simply file the amended return, but they're pretty good about including instructions so the letter probably indicates what you need to do. Don't delay in taking action, as the IRS can and will garnish wages if they are owed (or think they are owed) money.

Update: OP contacted IRS and they didn't even want an amended return, just the completed Form 8606, so it's worth calling the IRS first with these letters.

Hart CO
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  • So my age is not over 59 1/2, I am 38 I guess that means I was in fact NOT ALLOWED to withdraw it? – JonH May 12 '17 at 15:13
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    You can withdraw your original contribution at any time, for any reason. Sorry when I first posted I didn't notice those two lines got mushed together. – Hart CO May 12 '17 at 15:14
  • So this sounds like I did everything correctly? So why does the IRS want close to 2000 dollars from me? – JonH May 12 '17 at 15:15
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    Did you record the withdrawal on your tax return? The IRS has a copy of your 1099-R, if you didn't record it, they may assume the withdrawal is taxable. – Hart CO May 12 '17 at 15:18
  • I think that is where I messed up I believe it was my first time using turbo tax and I just didn't pay attention to filling in a 1099R. Let me edit my question and post more details with a screen shot of what I just downloaded from Fidelity maybe this will help clear things up. – JonH May 12 '17 at 15:21
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    I edited my question can you please advise me on my options. I am sorry for being such a headache - I really messed this up... – JonH May 12 '17 at 15:25
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    Note that for a Roth IRA distribution, he must also fill out Form 8606 Part III. It is that form that calculates what amount (if any) is taxable. – user102008 May 12 '17 at 15:29
  • @JonH If you ignored the form then my guess was correct, the 1099-R doesn't show taxable amount, but that doesn't mean there is none, it just means the issuer doesn't know if it's taxable (or leaves it blank so they don't have to fuss with tracking it). So you just need to file an amended return, I'm sure turbotax can handle that since they have your original return already. It's been a while since I've dealt with such a letter from the IRS, it may have specific instructions to follow, but an amended return should suffice. – Hart CO May 12 '17 at 15:30
  • @Hart CO - The form I posted in my question is kind of misleading. It just says I withdrew 4750. Wouldnt the irs have this info already? Where on that form does it say this is taxable? I guess I am confused how the IRS determined / assumed this. Who is right or wrong here? Does my 1099R form from Fidelity make sense? Would the distribution code "J" have any meaning to this? – JonH May 12 '17 at 15:33
  • @user102008 - Where can I get this form? – JonH May 12 '17 at 15:33
  • @JonH If you search for any form it will pop up on IRS website, but if you file the amended return with Turbotax they'll include the forms you need. The 1099 doesn't say it's taxable, but that doesn't mean it's not taxable, without the supporting form and the completed lines on the 1040, the IRS assumes it's taxable because they have no reason to believe otherwise. – Hart CO May 12 '17 at 15:37
  • @HartCO - Does an amend go with when I do my taxes for 2017? Or is this something I can do now? Whats the supporting form you mentioned, the 1099R doesn't say much except that I took 4750 out. – JonH May 12 '17 at 15:38
  • You can file an amended return any time, best not to wait when the IRS thinks you owe. I'm not certain whether you'd need additional supporting documentation or not, but if needed it would probably just be a statement from Fidelity showing your contributions. – Hart CO May 12 '17 at 15:46
  • Let us continue this discussion in chat. – JonH May 12 '17 at 16:27
  • @HartCO - Do you have 1 or two minutes to chat? – JonH May 12 '17 at 16:28
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    What an awesome answer. Just so everyone knows I called the IRS...waited on hold for an hour but they were so nice. All I had to do was fill in the form 8606 (thanks to @user102008) also for that. And I'm good to go! – JonH May 12 '17 at 17:03
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    @JonH Yeah, IRS folks are shockingly nice and helpful on the phone. – ceejayoz May 12 '17 at 18:38
  • I'll third that. IRS is incredibly competent and helpful compared to most government agencies and private companies when it comes to resolving issues like this. – R.. GitHub STOP HELPING ICE May 12 '17 at 20:54
  • I would imagine the IRS gets its share of ... difficult callers. I've only had good interactions with them: you catch more flies with honey than vinegar. – Peter K. May 14 '17 at 20:09
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    Just got the official letter from IRS stating I owe them nothing. Thanks to this answer I saved a ton of money! – JonH Aug 03 '17 at 02:39
  • Calling the IRS? I was hunting high and low on the form they sent me a couple years back for a phone number, but I couldn't find one. What is their number for this? – palswim Apr 01 '20 at 16:55
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I just want to point out something that seems to be generally true:

If you are supposed to report something to the IRS, and you don't, the IRS will probably send you a letter assuming the maximum possible tax liability, and it's up to you to prove that scenario is incorrect.

In your case you obviously owe no tax, but since you didn't report it, the IRS simply assumed that you do owe tax until you prove otherwise. You're one form away from fixing the issue.

I have first hand experience that this is also true if you forget to report an HSA distribution. I received a letter considering my entire distribution as if it was for non eligible medical expenses. This made the amount taxable and had an additional 20% penalty to boot. Of course I have medical receipts for all of the distributions which makes them not taxable, and had I simply put the correct number on my return to begin with I wouldn't have had to fill out the additional form to correct my mistake.

TTT
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  • Lesson learned be very thorough doing your own taxes. At least i can keep 1950 in my pocket now. Had the check written to. – JonH May 12 '17 at 20:10
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    I once got a corrected 1099-B from a brokerage. They sent it to the IRS too, and either it wasn't correctly marked as a correction, or they didn't notice, or I did something wrong. In any case the IRS sent me a letter with the tax-maximizing assumptions a) that I hadn't reported the stock sale at all and b) that I had zero basis. Thus, they calculated that I owed them 25% of the gross proceeds. The point of my story is to give one more piece of anecdata to your general truth. – stannius May 12 '17 at 20:38
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The best thing you can do here is work with the IRS to the best of your ability. You can attempt to call them, attempt to go to one of their local branches in your area, or just hire an accountant to solve the problem. Just be mentally prepared to write a check.

You could attempt to figure this all our yourself, but then a lot of tax law is open to interpretation. This is why I would recommend seeking the IRS's help if you DIY. Once you have addressed the issue to the satisfaction of the IRS agent, this will no longer be a problem. Provided you have a good attitude (which you express in your question) and are honest, I have found them very easy to work with. You will be a refreshing change of pace to the actual tax cheats.

While I understand that you are not seeking advice on what got you your situation, I would like to offer some encouragement. Good for you for learning from, and addressing your mistakes. Doing this will serve you well in the future.

Pete B.
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  • Pete - Thanks for the words of encouragement. I don't mind writing the check in fact I have written it I just haven't sent it. I guess I was looking for someone to answer the question of "Can I withdraw from my Roth IRA my own money - not my gains" ? Again if I foobared and messed up I will own up to the mistake and fix it. – JonH May 12 '17 at 15:11
  • The IRS (unlike some of the state tax boards that rhyme with schmalifornia) is usually pleasant to deal with. Don't assume you owe the entire penaly -- getting some help will result in you paying the least amount possible for the mistake and also set you straight going forward if/when borrowing from an IRA. Me, I'd call the IRS to start. – Rocky May 12 '17 at 16:38
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    @Rocky yes I called the IRS they were pleasant and helpful. Just need to fill out one form and I am done! – JonH May 12 '17 at 17:10
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You need to fill out form 8606. It's not taxable, but you still need to report it

Cpa
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Yes sir, been there did that. Now a Roth account is considered income if you it pull out. It is your money and you have to report if you pull it out. FYI, open a savings account, and put it in that so if you need it this will not happen.

RonJohn
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Jennifer Wilson
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    You realize, the existing answers have correctly answered the question. Your answer is wrong. The Roth money (except for earnings) were already taxed. The original deposit is not subject to tax again. – JTP - Apologise to Monica May 14 '17 at 17:55
  • @JoeTaxpayer: it does need to be reported even though it isn't taxed, in much the same way tax-exempt bond interest and foreign earned income and (most) social security benefit are reported but not taxed. This is duplicate and not very helpful, but not really wrong. – dave_thompson_085 May 14 '17 at 19:54
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    "Considered income if you pull it out". Are you suggesting the OP means it's income but not taxable income? She could just as easily have said this as "you need to report the withdrawal, but aside from any earnings, it's not taxable." I'm not getting that from this answer. – JTP - Apologise to Monica May 14 '17 at 20:23